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Constructing Consistent Financial Planning Models for Valuation

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  • Ignacio Velez-Pareja

Abstract

In this work we show a simplified financial planning model. In reality, financial planning models are huge and cumbersome. This is a very simplified model compared with what is found in practice.We present some basic principles for constructing the financial statements needed for valuation. We show in detail all the items of the financial model and show the formulas to be used for constructing the financial planning model. The relevant financial statements are: the Balance Sheet (BS), the Income statement (IS) and the Cash Budget (CB). The construction of the financial statements starts from input data and policies and/or targets (i.e. accounts receivable policy or target). With these targets or policies we can construct the financial statements. The contribution of this work is double: one is to show that we can construct financial statements without the use of plugs and circularity and the second is that we can use a very simple approach to construct cash flows and to value them. The model shown has two parts. One is the proper financial statements forecast. The second one is a simple cash flow calculation and valuation exercise using the Capital Cash Flow and assuming the risk of the tax savings equal to Ku, the cost of unlevered equity.

Suggested Citation

  • Ignacio Velez-Pareja, 2009. "Constructing Consistent Financial Planning Models for Valuation," Proyecciones Financieras y Valoración 5747, Master Consultores.
    • Handle: RePEc:col:000463:005747
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    More about this item

    Keywords

    Accounting; Forecasting Financial Statements; Decision Making; plugs; Planning and control; double entry principle; unbalancing problem; cash flows; firm valuation; cost of unlevered equity;
    All these keywords.

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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