FINC 333: Financial Modeling
Prerequisites: FINC 331, ITEC 281 is strongly recommended
Credit Hours: (3)
This course provides hands-on modeling experience that begins with construction of a basic financial model and ends with completion of a full-scale forecasted model with valuation components. The primary focus of the instruction and deliberation will be the tools and techniques used in solving real world financial problems. The course requires access to computers, databases and software tools and will teach skills important to the investment and corporate organization workplace.
Detailed Description of Course
Introduction
Overview of class, objective and subject outline; discussion of practical applications
Some useful Excel tips for modeling
Modeling best practices; tips & tricks that will help you speed up your modeling;
creating your own formats, custom lists, etc.
Practical and Hands-On
Linking sheets; drilling down; logical tests (“IF” statements); build an amortization
schedule, summing & counting functions; IS functions, errors & warnings; control sheets,
naming cells & arrays; vlookups, hlookups; choose functions
Introduction to Time Value of Money
Time value of money; present and future value; compounding (annual, periodic, continuous);
annuities and perpetuities; complex problems
Pro-Forma Modeling
Financial ratios relative to sales; projecting value drivers; internal and external
financing; the “Plug” – modeling the financing of the firm; effective sensitivity
analysis; Gordon’s Growth Model; terminal values; estimating sales growth; aggregating
domestic and international sales; financial ratio analysis; complete a DCF valuation
model; compare your results to the most recent traded price of select company; pro-forma
statements; modeling debt or cash as the “plug”; debt repayment schedule; complete
a DCF valuation model; compare your results to the most recent traded price of select
company.
Project Analysis
Payback and discounted payback; Internal rate of return (IRR) and modified IRR; net
present value (NPV); EVA; pros and cons of each
Discounted Cash Flow Valuation
Overview of DCF and intrinsic valuation; determining cash flows; real vs nominal returns;
terminal value; asset values; comparables; perpetuities and growing perpetuities;
enterprise value vs equity value
Bond Math
The concept of present value; the bond price equation; three types of yield: coupon,
current & yield to maturity (YTM)
The Yield Curve
Why is it important?; its shape; theories; how is it used?
Bond Math II
Realized compound yield; duration: what and why?; convexity: what is it?; dissecting
a zero coupon bond: pricing off the curve
Some Strategies
Ladders; immunization; hedging
Statistical concepts: probability distribution
Mean; variance and standard deviation; skewness; kurtosis; covariance; correlation
Statistical concepts: the relationship between a stock market and the market portfolio
Market portfolio; characteristic line; beta
Performance measurement: using risk-adjusted returns
Sharpe's measure; Treynor's measure; Jesnen's measure
Portfolio Optimization
Using Goal Seek and Solver to build optimal portfolios for known risk tolerances,
creating an efficient frontier array and chart with Excel’s data tables
Brief Review of Option Basics
Types of options and contract specifications; profit/loss diagrams; minimum and maximum
values; effect of interest rates on call and put option values; effect of volatility
on call and put option values; early exercise considerations
Black-Scholes Option Pricing Model
Black-Scholes: the formula; what the formula means; computing an option price; adjustment
for cash flows on the underlying instrument; options on dividend paying stocks; implied
volatility; historical volatility into B-S
Introduction to Arbitrage Pricing Relationships
Synthetic positions; arbitrage trading strategies; put/call parity; locking in mispricings
with synthetic positions
Nature of Futures Contracts
What is a futures contract?; forward contracts versus futures; comparison to trading
''cash market'' securities; securities buyers/sellers versus futures longs/shorts;
comparative cash flows cash versus futures positions; different meaning of margin;
Characteristics of Futures Contracts
Standardized contract specifications; daily settlement; margins; futures margins,
initial and maintenance; comparison to securities margins
Hedging With futures contracts
Review of fundamental of hedging; concept; risk and return of hedged positions; simple
applications
Detailed Description of Conduct of Course
The course will consist of lecture, applied group work, and applied individual work.
Goals and Objectives of the Course
For a General Education Course, in addition to a statement of course-specific goals and objectives, include a description of the broad general education program goals and the goals established for the particular knowledge area of the program as these goals will be addressed in this course.
Having completed this course, students will be able to:
• Project an income statement and balance sheet
• Create and interpret pro-forma projections
• Construct a Statement of Cash Flows
• Create DCF-based valuation models
• Incorporate projection scenarios in a model
• Perform meaningful sensitivity analysis
• Determine the value of equity or the firm using multiples
• Understand the basic concepts of probabilistically-measured risk
• Use common function keys, differentiate between different ways of summing and counting,
select alternatives to using the IF function
• Select and apply appropriate lookup and reference functions
• Create a Pivot Table to analyze data sets
• Use functions for discounting on uneven periods
• Explain the basics of bonds: prices, quote conventions, accrued interest
• Calculate nominal yield, current yield, real yields and yield to maturity
• Understand duration analysis - definition, calculation, interpretation, limitations
and
• Build optimal portfolios
Assessment Measures
For a General Education Course, in addition to a statement of course-specific assessment measures, include a description of the ways student learning will be assessed to determine fulfillment of the broad general education program goals and the goals established for the particular knowledge area of the program.
Students may be assessed on homework assignments, class participation, and exams.
Other Course Information
Review and Approval
March 6, 2012