Financial Statement Analysis
Working Capital
This session provides delegates with an understanding of the importance of working capital in the context of a company’s financing structure and cash flows. The difference between working capital and operating working capital is analyzed using several ratios. Delegates complete a working capital analysis for the peer group.
Non-Current Assets
This session illustrates the difference between tangible and intangible assets and their use in a business. Delegates learn about purchasing, depreciating/amortizing and selling tangible and intangible assets, and how these transactions are reflected in the financial statements.
Debt and Equity
In this session delegates learn how companies finance their operations. The characteristics of debt and equity are analyzed, including how to account for new debt and equity issues. Various kinds of debt instruments are identified, and the main equity accounts are examined. Finally some of the most important ratios are covered.
Cash Flow Statements
Delegates learn how to build cash flow statements using historical and forecast balance sheets. The relationship between cash and changes in assets, liabilities and equity accounts is analyzed in detail, allowing delegates to understand the full integration of the income statement, balance sheet and cash flow statement. The cash flow session is particularly relevant as a foundation for modeling skills.
Cash Flow Statement Issues
Delegates review how to complete a cash flow statement from an income statement and two balance sheets. Accounting complexities are introduced including affiliates/associates, non-controlled investments, and asset sales and purchases.
Financial Statement Analysis and Corporate Financial Strategy
Ultimately financial statement analysis is only a tool to express views on a company. This session will focus on using ratios and financial statement information as a means to identify a company’s financial strategy and the implications of different financing strategies on the overall analysis. Delegates will then look at some recent JP Morgan equity and credit research to see how financial analysis is presented in research reports.
M&A Accounting
During this session delegates learn the accounting rules to incorporate equity investments in the consolidated accounts and work on several examples by preparing proforma financials for a variety of cases. Complexities such as non-controlling interests and equity method investments (associates/affiliates), and their impact on earnings and cash flows are also covered.
M&A Accounting Issues
This session reviews the fundamentals of M&A accounting. In addition, complex areas such as the valuation of non-controlling interest, goodwill calculation, the treatment of fees and tax issues are covered.
Debt Accounting and Modeling
This session covers the accounting for PIK instruments, bonds issued at a discount and convertible bonds.
Ratio Analysis
Understand the key ratios used in financial analysis and what they can tell you about a business.
EPS
During this session delegates will cover the calculation of basic and fully diluted EPS.
Pensions
This session covers the accounting and analysis of pension information as published under IFRS and US GAAP, with a focus on extracting and using the data needed for valuation and deal structuring.
Taxes
This session covers the principles and reporting of taxes. Delegates will review tax issues in detail and cover the impact of deferred tax assets and liabilities on their analysis. Tax losses and carry forwards are also covered as well as the deferred tax implications of M&A transactions.
Leases
This session covers the reporting and analysis of leases. In some sectors leasing is a big issue and can cause a lot of noise when performing company comparisons. Consequently, it can be critical to be able to identify the relevant numbers and make the appropriate adjustments in order to compare “like for like”. This is done in both a valuation and credit context.
Stock-Based Compensation
This session covers the principles of accounting for stock awards such as employee stock options, restricted stock and performance shares. This program will explain the logic of the rules on expensing stock awards, and cover the basics of the accounting. The valuation impact for comparables and discounted cash flow analysis will then be covered in detail.
Financial Instruments and Hedge Accounting
This session begins with an overview of the definitions and different types of financial instruments, together with an explanation of the accounting treatments. After understanding the basics, the principles of hedge accounting are explained, using numerical examples and case companies for illustration. Finally the potential issues in assessing a company which uses derivatives are considered.
Working Capital Issues
Working capital plays a key role in liquidity analysis, cash flow management and operating efficiency. The aim of this session is to help delegates acquire a practical understanding of working capital, enabling them to analyse it from different perspectives and to model it appropriately. The session includes the analysis of how business seasonality generates working capital volatility, illustrated using a quarterly forecast model. The last part of the session is dedicated to operating working capital issues in M&A deals.
Working capital plays a key role in liquidity analysis, cash flow management and operating efficiency. The aim of this session is to help delegates acquire a practical understanding of working capital, enabling them to analyze it from different perspectives and to model it appropriately. The session includes the analysis of how business seasonality generates working capital volatility, illustrated using a quarterly forecast model. The last part of the session is dedicated to operating working capital issues in M&A deals.
Financial Modeling and Forecasting
Three Statement Modeling
Through the process of building a more complex three statement model, delegates are taught how to model operating cash and calculate interest using average debt and average cash balances. The class will address in detail how to work with intentional circular references. The issue of non-intentional circular references is covered and delegates are taught modeling rules that are designed to help avoid them. The session is designed to expose delegates to different three statement modeling styles: multi-sheet, tower, and different income statement layouts. Exposure to a mix of modeling styles will help prepare them to work on in-house models or models they may inherit from other finance professionals.
Financial Modeling and Forecasting
This session will explain the basic workings of the trading floor, the flow of business from client to sales and to trader. Examples will be used showing the various types of order management – worked orders, market-making and spread trades. The role of research and trade support in supporting client business will also be covered. how to build a three statement model using a detailed revenue forecast with price and volume drivers. A full debt schedule, including a cash sweep, is incorporated into the model. In addition to the main class case model, delegates are given exercises to help them understand more complex modeling issues (for example, detailed depreciation schedules and working capital items). Common errors are covered from balancing a non-balancing balance sheet to debugging a model that is non-intentionally circular.
Integrity and Error Checking
In reality, more time is wasted trying to find out why your model does not balance than the time you took to build it in the first place. This program focuses on useful tips and tricks that can be used to interrogate the data in financial models and useful methods for finding errors quickly. It will also provide tips and tricks to reduce errors in the first place.
Editing
In reality, once the initial model building process is complete, it is very common for the model to be modified. Often adjustments – the inclusion of a share buy back or the addition of expansion capex for example – are made. This session covers modeling the effects of these adjustments without creating blow-ups or errors.
Financial Modeling from Scratch
In this session we build a forecast model using the historical financials and the business plan of a case company (a manufacturing business). The focus is on analyzing and discussing the forecasting methods used most commonly by bankers and equity research analysts, reviewing the relevant accounting concepts wherever necessary. We also cover how to efficiently build the cash flow statement from scratch. Once the structure of the model is ready, delegates are asked to benchmark their projections against current research analyst forecasts; any significant differences are then discussed and the forecasts adjusted, if necessary.
Taxes – Modeling
Understand when and how to model deferred taxes and net operating losses (tax loss carry forwards).
Working Capital – Modeling Seasonality
Delegates will build a fully integrated forecasting model with the focus on monthly forecasting in the first year.
Interim Period Modeling
This module addresses the practical problems of quarterly (or six-monthly) forecasting and modeling. Ideally, the interim model should be easy to fill in and roll-over when new results are announced, and the historical interims should seamlessly integrate with the forecast interims within the first forecast year. Delegates build a three statement quarterly model in class using the financials of a seasonal business.
Cash Flow and Sweep Modeling
Cash flows generally create the biggest issues in three statement models and result in model discrepancies and mistakes. This session covers a review of complex three statement models with a focus on cash flows and cash sweeps. Delegates will identify the relevant cash flow changes and build the operating, investing and financing cash flows. Once the model balances, delegates will add a detailed cash sweep with mandatory debt repayments and amend the cash flow accordingly. In addition, we will review the issues concerning the calculation of interest, the resulting circularities and the management thereof.
Modeling Foreign Exchange Translations
This session focuses on modeling in different currencies and the related issues. Starting from a simple three-statement integrated model, we translate the financial statements into a different currency, using end of year FX rates, leading to the creation of translation gains and losses. We show how the FX translation gains and losses can be reconciled within the model and we discussed the accounting rules governing FX translations. We then introduce average FX rates, increasing the model complexity, and we analyze the impact on the model.
Modeling Pensions and OPEBs
This session provides a detailed understanding of the analytical framework underlying the calculation of pension assets and liabilities and the related income statement items. During the session we use simple exercises to gradually build up a simple but complete pension forecast model. As we go along, we also cover the current accounting framework in relation to pensions and OPEBs. We then examine a three statement model for a real company, and we analyse and expand the pension forecast component of it. In the last part of the session, we examine the valuation implications of pensions and the impact of different forecasting choices on value.
M&A Modeling
M&A Modeling Issues
This session addresses four key complexities in M&A models: Non-coterminus year-ends, using a flexible deal date, currency translation and the creation of a non-controlling interest. In order to fully benefit from the session, delegates should have knowledge of the fundamentals of M&A accounting and familiarity with financial modeling.
Merger Process and Arbitrage Fundamentals
The session starts with an overview of the mergers regulation, filings, deadlines and pricing floors. The session also outlines the role of the M&A team during this takeover period. The session concludes with an overview of hedge funds merger arbitrage strategies.
M&A Documentation Fundamentals
The session examines the documentation used in M&A deals.
Key topics:
- Confidentiality agreement (Non-Disclosure Agreement)
- Engagement letter
- Offer/bid letter
- Letter of intent/heads of terms
- Sale and purchase agreement
LBO Modeling
LBO Modeling Issues
Learn how to build complex components of LBO models. Delegates will gain a thorough understanding of why a component is used in practice, how it works and how to model it.
Acquisition Finance Modeling
This session covers the major types of transactions involving debt financing including leveraged buyouts and mergers and acquisitions. The course starts by explaining the logic and rationale for these transactions and then focuses on the financing implications for the company. The class will use a fully integrated acquisition financing model for two real life companies to develop a combined cash flow forecast. Delegates will then use an additional model to learn how to establish debt capacity through a debt layering exercise. They will then apply learned concepts to the original acquisition financing model. The class will incorporate scenario modeling in order to incorporate different financing structures. Finally the class will develop sensitivity analysis on various financing options, examine credit impact of the transaction and structural issues of the financing choice.
Completion Mechanisms
Beginning with a brief introduction to working capital. The main issues and mechanisms for completion in an M&A transaction are explained. Real world examples reinforce the learning, enabling you to immediately apply it within your organization.
Valuation
Trading Comparables
Delegates are introduced to preparing multiples using real company data and a case study including a range of international companies. We focus on how to select comparables, where to find data in published financials and equity research reports, how to clean the raw data, and how to document and check the output. The most commonly used multiples are explained and complexities such as normalizing for non-recurring expenses/income are also covered. The session ends with practical exercises on the application of multiple analysis to value a company.
DCF Fundamentals
Delegates will assess and calculate the unlevered free cash flows of the target company and perform a discounted cash flow analysis on the target company. The resulting value will be sensitized using data tables.
DCF Valuation
Delegates learn how to build a discounted cash flow valuation model. The session starts with an overview of the valuation methodology, and the steps required in setting up a valuation model. We then focus on the calculation of free cash flow. A detailed ratio analysis is used to establish the reasonableness of the forecasts and to identify when the target company reaches steady state. We analyze the weighted average cost of capital, calculate terminal values, using both the exit multiple method and the perpetuity growth method. We discount the free cash flows to arrive at enterprise values and calculate the implied share price. Once the valuation is complete delegates perform several checks on the analysis using key ratios, and sensitivity and scenario analysis.
DCF Issues
This session focuses on the different approaches of terminal value calculations. Delegates will model a 2 stage steady state terminal value and understand how returns fade to WACC over time.
DCF with Synergies
Synergies are a highly important aspect of M&A. They should justify a certain premium paid and can often make or break a deal. Hence it is important not only to understand the concept of revenue versus cost synergies (at COGS & SG&A level) but also to assess and value synergies correctly. This session addresses the concept of valuing estimated synergies expected to arise as a result of a transaction. The synergies are valued by discounting the expected cash flows using the weighted average cost of capital of the target. Of course once fully integrated into a new company one can also look at the synergies on a post deal WACC basis. In addition, we also explore the concept of risk adjusting the weighted average cost of capital to reflect risk of the synergies. Finally, delegates will learn how to incorporate the value of synergies into their DCF model or any other valuation approach.
World of Returns
This program focuses on the analysis of returns. First, the importance of returns in relation to value creation is illustrated. The concept of invested capital is then introduced and practical examples are used to show how to calculate the return on invested capital. We then show how to incorporate explicit return assumptions in a DCF model by using the value driver formula to calculate the terminal value. The relevance of returns in an M&A context is also discussed.
Transaction Comparables
Delegates are introduced to preparing a transaction multiples matrix using LTM earnings. The rationale and components of control premium and its impact on valuation are discussed. A comparable transaction analysis is performed on the case industry.
LBO Valuation
Delegates are introduced to the basic concepts underlying leveraged buyouts. The session starts by establishing why private equity firms can create value through leveraged buyouts and how the levered valuation fits into the valuation road map. Using a simple free cash flow forecast, delegates establish how much a financial buyer could pay for the target company. Delegates then build a simple LBO model.
Valuation Issues
This session covers the more advanced areas of multiples and DCF valuation. Enterprise value and income statement adjustments are addressed for both DCF and multiples, using case company examples.
Valuation Issues – Sum of the Parts
Many large companies are in multiple businesses and/or have varying equity investments in other companies. It is best to analyze and value each unit separately and then sum the parts to estimate the value of the entire company. During this session delegates review the consolidation rules to incorporate equity investments and measure the enterprise value of a business.
Capital Markets
Debt Capital Markets for Issuers
In this session delegates will cover the main debt products available to corporates. Using a case company, the debt capacity is calculated before different funding options. Both long and short term, and public and private financing options are explored. Finally the bond issuance process and key documentation are discussed.
Fixed Income Fundamentals
The aim of this session is to provide delegates with an introduction to the underlying mathematics of fixed income. The session does not focus on any particular financial instruments, but develops a comprehensive tool-kit that is essential for every professional in the finance sector to understand interest rates and fixed income instruments.
Debt Structuring
Understand how to structure a loan around the cash flows of a company and key negotiation points.
Convertible Bonds
The aim of this session is to model convertible bonds (and exchangeable bonds, mandatory convertibles). We will drill down on the technical terms, so the attendee can identify the bond characteristic from the conversion option characteristic. We will look to pros and cons to issuers, and the motivations of different investors and the impact on the corporate. The class concludes with the accounting of convertibles, and modeling a convertible bond over its life.
Equity Capital Markets
In this session delegates will cover the main products of the equity capital markets. Using a case company, the delegates will tour through the equity capital markets, embracing IPOs, secondary offerings, and different share classes. Finally listing rules and some of the subtleties of the pricing of equities are examined. This session will initially introduce derivative markets and instruments including the mechanics and uses of forwards, futures and options. Having introduced the instruments, we will then explore how they are used in managing interest rate, foreign exchange and commodity price risk.
We begin with forwards, futures and options to manage commodity price risk, using the case companies to illustrate. We will then examine interest rate risk management with a focus on swaps and FRAs to manage interest rates and introduce the principles of swap pricing. The aim of this session is to explain how the product can change interest expense profile.
The session continues with managing currency risk with forwards, options and cross-currency swaps. The aim of this session is to explain how the product can help manage foreign exchange risk from revenues and costs, and from debt denominated in a foreign currency. We will conclude with a brief introduction to equity derivative instruments.
Project Finance
In this session, we look at project finance, what it is, examples to illustrate usage, pros and cons. We look use case studies from developed and emerging markets to illustrate. The session includes a modeling exercise on modeling project finance.
Interest Rate Derivatives for Corporates
This session will focus on the ways in which corporate clients use interest rate swaps to manage their financing risk. The relationship between the government yield curve, swap curve, and credit curves will be explored. The ways in which client and market-maker positions generate profits and losses will be considered. Inflation-linked swaps will be introduced at a high level.
Interest Rate Derivatives for Corporates; Further Hedging Strategies
This session builds on a basic understanding of how interest rate swaps are used to alter interest rate risk for corporates. We look at other interest rate derivates, such as caps and floors, and also look at alternative uses of interest rate swaps in the pre-hedging of debt finance. Swaptions are also explored as an alternative to conventional pre-hedging.
Bond Cash Flows and Valuation
During this session we discuss the detail of calculation of coupons and accrued interest, and we build a bond pricing model in Excel, exploring how bond valuation is performed between coupon dates. While building the model, delegates will develop their understanding of cash flow sizes and dates, accrued interest, discount factors and yield.
Bond Hedging
This session introduces the primary tools used in measuring and hedging interest rate risk using vanilla fixed income instruments. Delegates will learn how to calculate modified duration and dollar duration, and the topic of convexity will be introduced. Market risk and profit and loss from a bond position is explored. During the final part of the session hedge ratios are described.
FX Fundamentals
This session will introduce delegates to the workings of FX markets. Quotation conventions will be emphasized. The relevance of FX to every market, client and transaction type will be made clear through example. Delegates will learn how to calculate cross rates through triangulation and also how the no-arbitrage condition defines forward FX rates. Developments in bank funding and how this affects forward rates will be discussed. Finally the development of algorithmic trading by both buy-side and investment banks for speculation and hedging respectively will be discussed.
FX Market Fundamentals and Derivatives
This session will introduce delegates to the workings of FX markets. The relevance of FX to every market, client and transaction type will be emphasized. At the end of the session delegates will have gained an understanding of how the investment bank serves clients in these markets, and how revenue is generated. The mechanics and purpose of spot, forward, FX swaps and cross currency swaps will be explained.
Credit Analysis
Corporate Capital Structure Analysis
This session examines the many financial consequences of leverage, and the factors that affect the decisions taken by management in relation to the corporate financial structure. We start by defining what is meant by capital and what financial leverage is. We then examine the impact of debt on profits, earnings per share (EPS) and return on equity (ROE), applying the analysis to a real company using Excel. We then focus on the value impact of financial structure decisions, examining the value of tax shields and the impact of leverage on WACC. Wrapping up all the work done so far in the session, we examine the way that credit rating agencies use ratio analysis to establish credit ratings. We then move on to the analysis of liquidity risk, showing how liquidity ratios can be used to examine whether a firm’s liquidity position is deteriorating. We use the accounts of some failing firms as case studies. The last part of the session is dedicated to building up the FRICTO framework – a comprehensive tool to address the key issues faced by a corporation when making capital structure decisions.
Financial Covenants
This session covers the financial covenants generally used in a Leveraged Facility Agreement. We will review the defined terms and put them into practice through the review of companies’ financial statements. Specific terms such as EBITDA, cash flow and excess cash flow will be identified in detail and delegates will calculate the relevant ratios from a set of financial statements.
Credit Ratings Advisory
In this session delegates examine the service, analysis and recommendations provided by a Credit Ratings Advisory team to provide a debt issuer with advice of how to structure its bond offerings in order to achieve a given credit rating for a specific debt tranche. The potential conflict of interest may that arise for a Credit Rating Agency active in this area, is also discussed.
How to Write an Investment and Credit Case
In the context of writing an investment/credit approval case, delegates incorporate the key concepts of credit analysis, credit/investment documentation, syndication/hold recommendations/issues, financial modeling and scenario management. Each of the concepts introduced in class generate the building blocks a realistic credit emo/investment recommendation. Delegates will work in groups alongside the instructor to write a credit case and ultimately deliver a recommendation to the “credit committee/instructor”.
Divestitures and Restructuring
Modeling a Reorganisation
The aim of this session is to build a model of a company under administration (e.g. Chapter 11). The model covers the pre-petition phase, the administration phase and the post-emergence phase. This model integrates a two stage accounting adjustment model into a three statement financial forecast model, and it incorporates both the financial and operational aspects of the restructuring.
13 Week Cash Flow Modeling
The aim of this session is to produce a 13 week cash flow model which fully integrates to a three statement financial statement forecast. Both a direct and an indirect cash flow statement will be produced. The financials are modeled for a variety of time periods: weekly, quarterly and annually. The actual financials are integrated so that the financial forecast is up to date and there is a variance analysis output section. The issues are the efficiency and integrity of the model.
Impact of Complex Debt Structures on Debt Restructuring
In this session we introduce the key characteristics of CDS and CDOs, describe their uses, and, using some case studies, show how they have influenced creditors’ behaviour, and what it may mean for a restructuring company. We also look at debt seniority and how conflicts of interest may arise impacting restructuring. Finally, we look to second lien and mezzanine debt and their impact on the restructuring process.
Cash Flow and Credit Analysis for Potentially Stressed Companies
This session focuses on the analysis of companies that are solvent, but might become distressed should trading or financing circumstances deteriorate. We focus on operating cash flow dynamics (e.g. cash conversion), capital structure issues (e.g. understanding structural issues and assessing refinancing risk) and valuation implications (both for equity and debt). The options available to companies to avoid financial distress are also reviewed. Two case studies are used for practical application throughout the session. The focus is different from classic credit courses in using only the most relevant credit tools, not focusing on credit rating agencies, and including loan documentation, thus may be more relevant to practitioners who do not need a full suite of credit tools, just the tools for diagnosing degrees of stress.