Self-Study Financial Modeling Training – The Way of the Future

If you work in the finance industry, with:

• an unknown economic outlook;
• companies budgets stretched to the limits; and
• unemployment at all-time highs

it is important to stand out from the rest.

Learning and improving your financial modeling skills can help you to do this. At Video Financial Modelling we understand that not everyone can afford training sessions ranging from $500-$2,000 each.

To cater to this Video Financial Modelling has setup a number of self-study financial modeling training courses to cater for people who want the best possible training at a fraction of the cost.  We have training courses to suit all levels of financial modeling expertise.

What differentiates a self-study financial modeling training course from a seminar? Yes, the price, but there are also a number of other factors.

1. Flexibility – given that the training is pre-recorded you can learn at your own pace. If you don’t catch a concept you can easily just rewind the video and watch it again.
2. Quality – since we only do each training course once, we only pick the best instructors to deliver you content.  
3. Ongoing customer support – because we have lowered our cost base, we supply excellent ongoing customer support and can answer your training course questions promptly.
4. Limited risk – we are so confident in our products that we have “try before you buy options” (at a nominal cost) for many of our training courses. If you proceed to purchase the full version the nominal cost will be deducted from the full purchase price.

In addition to the above, the self-study courses are hands-on giving you the best possible practical experience.  

Check the self-study financial modeling training at Video Financial Modelling today. 

 

What are Financial Statements?

Financial statements commonly refer to formal records of the financial actions of businesses, entities and in some instances individuals. The financial statements are used by various stakeholders in making economic decisions.

Businesses which are listed are usually required to prepare and issue their financial statements to their shareholders. In most instances these financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), US Generally Accepted Accounting Principles (GAAP) or UK GAAP. In recent times the accounting bodies have been working together to converge these reporting standards.

There are generally four major financial statements which are reported by businesses.

1)      Balance Sheet

2)      Income Statement

3)      Statement of Owner’s Equity

4)      Cash Flow Statement

The Balance Sheet shows an accurate representation of a business’s financial position at a certain fixed point in time. The Balance Sheet has three broad categories, assets, liabilities and owner’s equity. For example a bank loan would be shown as a liability on the Balance Sheet.

The Income Statement can be simply thought of as total revenues minus total expenses (including financing costs) over a period of time, usually a year. The Income Statement is usually based on an accrual basis – meaning that the revenues and expenses are recorded when incurred, not necessarily paid. In general an Income Statement is meant to show the performance of a company. i.e. higher Net Income generally means better performance (all else being equal).

The statement of owner’s equity shows movements in the Owner’s Equity component of the Balance Sheet. You can use a corkscrew account to calculate the movements from the start of the period to the end of the period. In general these movements are usually attributable to:  

• total comprehensive income;
• owners' investments;
• dividends;
• owners' withdrawals of capital; and
• treasury share transactions.

The Cash Flow Statement represents the flow of cash in and out of the business. The statement is usually divided into three categories:

1)      operating activities;

2)      investing activities; and

3)      financing activities.

If you liked this article, check out the financial modelling training or products at Video Financial Modelling. 

Working Capital - Debtors and Creditors

If you've been working or studying in finance you have probably heard of working capital before. If not then you might be wondering what the flip we are talking about. Well working capital is usually defined as current assets less current liabilities. If working capital is positive, the company has enough current assets to meet its current liabilities. If not then the company may have short term liquidity problems. 

In this blog tutorial we are going to look at two components of working capital, debtors or accounts receivable and creditors or accounts payable. 

What are Debtors and Creditors?

Ok, let's first start with Debtors. Debtors are current assets which arise when revenues are accrued but not paid. For example you book a sale of $100 on account, however you receive the cash 30 days from that date. The two entries you would make are:

1. when you book the sale on account - debit debtors/accounts receivable (Balance Sheet item) and credit revenue (P&L item)
2. when you receive the cash - debit cash (Balance Sheet item) and credit debtors/accounts receivable (Balance Sheet item reversing the account entry in (1))

Creditors are very similar to the above. 

Modelling Debtors and Creditors 

Ok, so you should have a good feeling of how this works now, so let's look modelling this. 

In 99% of the cases we can calculate debtor and creditor balances using the following formulae:

Debtor Balance = Revenue Accrual x Debtor Days/Days in Period

Creditor Balance = Expense Accrual x Creditor Days/Days in Period

For a yearly timescale the Days in Period would be equal to 365 days (we'll ignore leap years). 

From here you can find the total cash received or paid from revenue and expenses respectively. Let's look at this from a debtor perspective and utilising a corkscrew account (if you don't know what this is see our Corkscrew Account. What the? blog).

Debtor Account

Opening Balance          50

Add: Revenue Accrual  50 

Less: Cash Received    [x]

Closing Balance             [y]

Firstly let's find y. If we are looking at a year timescale and 30 day debtor days, then our closing balance (y) would be 50 x 30/365 = 4.1. 

Now we need to find x. Rearranging the formula we get: 

Cash Received (x) = Opening Balance + Revenue Accrual - Closing Balance (y)

 = 50 +50 - 4.1

 = 95.9

Ok, that might be a bit of brain dump.... so let's look at some examples. 

Debtor and Creditor Examples

You can follow along with the examples by downloading the Working Capital - Debtors and Creditors YouTube video and the Excel spreadsheet.  

Example 1

You forecast $2,000,000 of sales on credit each year from 2011-2015. Your credit terms are 30 days. What is the size of your debtor/accounts receivable in each of 2011-2015?

Ok, firstly and as always you need to put in a timescale as below:

Next let's put in the Revenue - Accrual. 

Now using the formula Revenue Accrual x 30/365 calculate the debtor balance.

Now you could calculate the cash received, but we will put in one more step. We will find the movements in debtors (i.e. debtor opening balance - debtor closing balance).

Now if we add the above debtor balance with the revenue - accruals we should get the cash received. 

Example 2 - Homework

Now we are not going to go through this example, but we run through the solution on YouTube and you can find the answers in the Excel spreadsheet. So why don't you give the problem a go?

Question: You buy services worth $1,000 every year from 2008 to 2011. You have credit terms of 90 days and you start with a credit balance of $250 at the start of 2008. What is your creditor/account payable balance at the end of 2011?

Take your Excel and financial modelling skills to the next level. Try our Excel and Financial Modelling training courses today. 

 

 

 

Financial Modelling - Sensitivity and Scenario Analysis

If a financial model is setup using best practice modelling techniques then putting sensitivities and scenarios should be simple. What is the difference between a sensitivity and scenario you may be asking. Well a sensitivity only flexes of one input, whilst a scenario flexes multiple inputs.

About the Inputs/Assumptions

At Video Financial Modelling we usually have one assumption sheet for a simple financial model and two assumptions sheets for complex financial models. The two assumptions sheets for a complex financial model are:

1)      A static assumptions sheet – inputs that don’t change over time. For example a scheduled construction end date.

2)      A time-series assumptions sheet – inputs that can change over time. For example inflation indicies.

Setting up a sensitivity or scenario analysis

Below are brief instructions to setup a sensitivity or scenario analysis manager.  

Step 1: The first step in setting up a sensitivity or scenario analysis is to incorporate, what we like to call a scenario selector. The scenario selector is simply a number between 1 and the “maximum number of scenarios you want to run”. For example say you want to run ten sensitivities/scenarios, then the maximum number you’d put in your scenario selector would be ten.

A simple scenario selector would just look like this.

Not much to it is there? Bear with us though. 

Step 2: Now that you’ve got a scenario selector let’s move onto incorporating a simple offset formula. The basis of this formula is to grab the relevant data from the selected scenario. The form of the formula we usually use for this is:

= offset(current cell reference, ,scenario selector) for static pages

= offset(current cell reference, scenario selector,) for time-series pages

Obviously if you have rows/columns in between the actual assumption you use in your model and your input, then you may need to adjust the above formula.

Step 3: So what happens if you want to use scenario 1’s input if you don’t have any data in the selected scenario? Well that is easy, we just add an IF statement in as shown below.

=if(offset(current cell reference, ,scenario selector)=””,scenario 1 cell, offset(current cell reference, ,scenario selector)) – for a static sheet.

Obviously it is nearly the same for a time-series sheet.

The logic behind this is that we don’t have to put all inputs in for every different scenario we do. We just put in the inputs we want to change from the scenario 1 (usually called the base case).

Sensitivity and Scenario Example

You can follow along with the below example by downloading the YouTube video and spreadsheet.

Ok, this might be confusing right now, but once we look at the below example our methodology should become apparent.

Say we had the following inputs and we wanted to find the NPV of equity distributions. Let's assume there are no taxes and our profit is fully distributed to shareholders as there is no debt in the company. 

Now let’s put in a scenario selector (Step 1 above). Obviously this scenario selector will not work on its own, so let’s now put in a an offset formula as per Step 2 above. The result is shown below. Now all our inputs will be moved to the 1st scenario and the formula will be placed where we previously had inputs.

Ok let’s now run a scenario, say scenario 2. Let’s put in rev of 55 and ops of 40. What happens? Because we don’t have inflation (and haven’t incorporated Step 3 above) in we won’t have any inflation.

Let’s change the formula as per Step 3 above to get:

Now we have an active scenario manager which we can change and run scenarios on. Putting it all together you should get NPV of equity distributions of 135 for the base case and 101 for scenario 2. See the below picture or download the spreadsheet to see the workings. 

Now for all of you out there who think you’ve got it why don’t you try this one. Find the NPV of the equity distributions if the inflation is 2.5% for the first five years and 7% for the next five years. Hint: Your scenarios will need to go down the page as this is now a time-series assumption (i.e. changes over time). The NPV of the equity distributions you should come out to be 137. 

If you liked this tutorial, try one of our Financial Modelling or Excel training courses today.  

MOD Function - Bridging the Time Gap in Excel

Say you had quarterly data and you want to collect this data onto a yearly page? How would you go about it? Probably a hundred different ideas came to your head when I raised that question. Video Financial Modelling has seen all of these. One sticks out ahead of the rest, the MOD function. 

Using the MOD function

The MOD function is quite simply awesome. In simple terms it takes a number and a divisor and spits out a remainder. The equation is shown below.

= MOD(number,divisor)

Does that bring back memories of school maths? Well for all of those people who can't remember, here is a couple of examples to help the mental juices:

• mod(11,3)   - 11/3 is 3, with a remainder of 2. So MOD gives us 2. 
• mod(12,3) - yes you guessed it. 0.
• mod(-11,3) - ok so this is getting a bit harder. The answer is 1. Why? Well because the MOD function gives the amount by which a number exceeds the largest integer multiple of the divisor that is not greater than that number. In this case the largest integer multiple that doesn't exceed -11 is -12. Still confused. Have a play around with the function. 

MOD function Example

Ok, so I promised you that I would show you how to grab data from a quarterly page and aggregate it on a yearly page so let's get started. Download the associated YouTube video and Excel spreadsheet. 

We have the following quarterly dates and associated revenue numbers. 

We want to aggregate these numbers on an annual page. Let's firstly put in annual dates in. You can put these on a seperate page or keep it simple and have it on the same page. This is shown below.

Now the magic. Below the quartlery dates, let's put in the following formula. Don't worry we will explain the components soon. 

= EOMONTH(quarter end date, MOD(month(first period ending date)-month(quarter end date),12)

This should look something like this:

Copy this fomrula across. Wow magic... hopefully this formula gives you the year ending for each of the dates? It sure does, now how does it work. Let's break it down:

= EOMONTH(Component 1,Component 2)

• Component 1: quarter end date
• Component 2: MOD(month(first period ending date)-month(quarter end date),12)

The first component should be pretty self explanatory, so let's look at the second component by looking at some brief examples.

Ok given that the first period ending date is always 31 Dec 2012, the month(first period ending date) will always equal 12. Simplifying the formula we get:

= MOD(12-month(quarter end date),12)

There are 4 possible options for the month(quarter end date). 3, 6, 9 and 12. i.e. corresponding to March, June, September and December. Let's look at each in turn.

• March - MOD(12-3,12)=9 
• June - MOD(12-6,12)=6
• Sep - MOD(12-9,12)=3
• Dec - MOD(12-12,12)=0

If you're switched on you should see a pattern above. The result is equivalent to the number of months to the year end. So if we combine this with an EOMONTH formula we will get to the year end. 

Now if we do a sumif formula (as below) we can aggregate the revenue numbers into yearly results.

We should get the following:

 

Now you may be wondering why we didn't just use a Year formula and then a sumif. Well that is definitely another option, but say you now had a monthly construction page and you want to aggregate or lookup this data in a quarterly page. Trust me this happens all the time in project finance deals. Well the answer.... use the above methodology and you can't go wrong. 

If you liked this blog tutorial check out our new advanced training course, Advanced Toll Road Model Training Course. 

For more free blog tutorials go to Video Financial Modelling's Blog.

 

 

 

 

Project Finance - Interest during Construction and Funding Requirements

Introduction

Greenfield (think of new build) project finance deals consist of both construction and operations period. In this blog tutorial we will focus on the construction phase of a greenfield project and find out how to calculate interest during construction, funding requirements and ultimately our required debt and equity drawdowns.  

Required funding during construction

You may be wondering what project costs may be incurred during a typical project finance construction phase. Here are a few of the most common costs:

• Construction costs - amounts which are usually paid from the Concessionaire (SPV) to the EPC contractor
• SPC costs during construction - administration costs, including management staff'ssalary, advisory costs, ongoing insurances etc.
• Upfront bid costs - cost incurred prior to financial close and to be recovered at financial close - advisory costs, consultants, insurances  
• Financing costs - arrangement fees, commitment fees, interest costs, equity yield (often in the form of sub-debt payments), Debt Service Reserve Funding

But how do we fund these costs?

As the majority of project finance deals have no revenue during construction, construction funding is required. 

In the most basic form funding for the above costs comes in the form of both debt and equity. The above costs are aggregated together usually on a monthly basis, with drawdowns on financing facilities assumed to occur at the end of each month period. 

Assuming that the drawdowns occur at the end of the month eliminates any circular reference related to interest during construction. There are however other gremlins (otherwise known as circularities) that we need to look out for such as commitment fees and arrangement fees. We can break these circularities quite easily, but we will save that topic for another day. 

Putting it all together- an example

Download the youtube video and spreadsheet to follow along.  

Ok, so we now know where our funding requirement is coming from and how it is funded. 

Now let's take a look at an example. Say we had the following assumptions:

Note: Let's also assumes there are no commitment fees or arrangement fees (i.e. we'll leave out the gremlins). 

Firstly let's work out our funding requirements. To do this we need to add the construction costs, SPV costs, upfront bid costs and the financing costs together. 

You'll note that we've missed out the financing costs for the moment. 

Now let's setup a corkscrew account for the debt as shown below. Remember in a corkscrew account the opening balance in the current period is equal to the closing balance for the previous period. Because we have a gearing of 80%, the debt drawdown will simply be 80% x the funding requirement. 

Given the debt balances we can now calculate the debt interest payments for each month. This will simply be 6% x opening balance x 1/12 (remember we are dealing in months). 

We can now feed this interest cost back in the funding requirement. 

The equity capital injected is then simply equal to (1-gearing) x funding requirement or equivalently the funding requirement minus debt.

If all has went smoothly you should end up with a debt amount of 121 and an equity amount of 30. 

A quick side note

In most instances, during construction there will be no free cashflow left over after utilising debt and equity. i.e. funding requirements should exactly offset debt and equity drawdowns.

If you like this tutorial you you'll love our financial modelling and excel training courses. Want more free blog tutorials? Check out Video Financial Modelling's blog. 

 

 

 

 

 

 

Free Bonus Excel Shortcuts

Free Bonus Excel Shortcuts

Blog Downloads: Youtube Video    Excel Spreadsheet       Macrostarter

Instructions for downloading your free shortcuts:

• download and copy the Macrostarter.xlsm to your desktop
• go to the windows button in the bottom left hand corner of your computer screen
• search for the folder XLSTART
• drag and drop or copy and paste the Macrostarter.xlsm file from your desktop into the XLSTART folder

Now you're ready. Open up a blank Excel sheet, then open the file you want to work with. Your Macrostarter.xlsm file is hidden in the background. 

Cool Free Excel Shortcuts

So what is contained in the Macrostarter.xlsm file???? Well to give you a clue, we think that these are two of the coolest Excel shortcuts around....

Ok, so maybe you won't be able to guess. 

Well they are....

Number formatting - puts a comma to separate thousands and also puts dashes for zeros - simply push CTRL+SHIFT+C on any number to apply

Date formatting - puts any numbers which are meant to be dates into the following format dd-mmm-yy. i.e. 31-Jan-11 - simply push CTRL+SHIFT+D

These two shortcuts are sure to save you plenty of time formatting your Excel spreadsheet or financial model. 

Do you want to become a Excel shortcut pro? If yes, then check out our Excel Shortcuts training course.

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Excel and Financial Modelling Training Courses

For those of you who don’t know Video Financial Modelling has recently launched their face-to-face group Excel and financial modelling training in Dubai and London. 

This is an exciting time for the team and we hope it is equally exciting for you. If you or your business needs quality:

- Financial modelling training, or

- Excel training

contact us for further details or a comprehensive course guide at training@videofinancialmodelling.com. 

As part of our early birds promotion, individuals or businesses registering for the Excel or financial modelling training courses up to the end of October will receive a 20% discount. 

Take a look at our Excel and financial modelling training courses today.

Corkscrew accounts. Why they are used in financial modelling

Introduction 

Now if you have been following Video Financial Modelling for a while, you should know what a corkscrew account is. For those of you who haven’t been following us you’re about to find out how corkscrew accounts can help you to model everything from financing facilities, ledgers all the way through to depreciation accounts.

So what is a corkscrew account?

A corkscrew account is simply a method by which the opening balance of the current period is equal to the closing balance of the previous period. This is probably best illustrated by an example. 

Say we had a financing facility with a closing balance of $50 at the quarter end 31 Dec 2011. What would be the balance for the period starting 1 Jan 2012? If you guessed $50 then you’d be right. Now let’s ramp it up a notch. 

Carrying on from the above example say that you drew $30 from the quarter starting 1 Jan 2012 and ending 31 Mar 2012. What would be the closing balance of the facility if no amortisation or interest capitalisation took place? If you answered $80 ($50 for the opening balance and $30 for the drawdown) you’d be correct.

Now imagine we had the $30 drawdown as per the last paragraph but we also had a repayment of $20 (Note: that it is very unusual to drawdown on a financing facility and amortise it at the same time). What would be the closing balance? It would be $50+$30-$20 = $60. This is represented as corkscrew account in figure 1 below.

Figure 1 – Example of a corkscrew account

Keeping convention to make your life easy

As you can see in Figure 1, Video Financial Modelling has a simple convention when modelling corkscrew accounts. All additions are positive and all deductions are negative. Simple I know, but we have seen many different styles of doing this. Doesn’t it seem logical to have inflows as positive numbers and outflows as negative numbers?  

Let’s look at an example

Given the below company net profits and dividends, find the retained earnings opening and closing balances for the period if the retained earnings balance at period 0 is zero.

Ok, so firstly we need to setup a corkscrew account. As with any good corkscrew you need to link the opening balance of the current period with the closing balance of the previous period. 

Secondly you can find the closing balance by summing all the rows above. Don’t worry if there are no numbers for the net profits or dividends. They will come soon. The important thing is that you stick to convention and make sure that corkscrew outflows are negative numbers and corkscrew inflows are positive numbers. It is very hard to make a mistake if you follow this convention.

Finally add the net profits and positive numbers and the dividends as negative numbers. Remember the formula for Closing Retained Earnings?

Closing Retained Earnings = Opening Retained Earnings + Net Profits - Dividends 

You should come out with the following where the period 10 closing balance is 93.

What else can you apply this concept too?

As mentioned previously you can apply this to many different situations. A few examples come to mind including common ledgers, financing facilities, depreciation accounts. The list goes on and on.  

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CFADS and DSCR - Sculpting

OK, so you have grasped the project finance definition of CFADS and DSCR from our previous blog tutorial, CFADS and DSCR - Words from a Foreign Language? But what can we do with these concepts? 

Besides calculating the DSCR, for the purposes of meeting loan documentation covenants such as the lock-up DSCR or default DSCR, we can also use a target DSCR to sculpt debt repayments. 

This is probably best illustrated by example. Say we had the following CFADS for Company A over a five year period.

To follow along with the examples by downloading the YouTube video and the Excel spreadsheet. 

We would like to know how much project finance debt we could raise for Company A in each of the following three scenarios.

1. Using a credit foncier repayment profile (don’t worry we’ll talk you through the concept in a second)
2. Using a target DSCR of 1.30x
3. Using a target DSCR of 1.10x

For each of the cases we have assumed that interest on the debt is at 6% and all debt is repaid by the end of year 5. Also assume that Company A is currently all equity funded. 

Case 1 – Credit Foncier Profile

You can think of a credit foncier repayment profile like a common fixed rate household mortgage. The key here is that you pay an amount which is constant each period (usually a month) to the bank. 

Ok, great you say, but how much debt can we insert into Company A if we are using a credit foncier repayment profile? One way we could find this value is by trial and error. Let’s proceed this way so that you can get a feel for the process.

Step 1: Let’s setup a corkscrew account, by utilising the fact that the closing balance in the previous period equals the opening balance in the current period. You can see this in Figure 1.

Figure 1 – Corkscrew Account

Step 2: Let’s put a plug figure of 5 into the cell highlighted in Figure 1. See Figure 2 for the result. 

Figure 2 – Corkscrew Account with plug figure

Step 3: Now let’s calculate the interest and principal repayments for the plugged debt amount. Interest is straight forward and can be calculated by:

= Interest Rate x Opening Debt Balance

The principal repayments are calculated using an Excel function called the PPMT. The function for our purposes is:

 = PPMT(rate, per, nper, pv) where

rate is the interest rate in this case 6% pa

per is a number between 1 and nper, in this case 1

nper is the number of periods remaining

pv is the opening balance of the account

You can see the PPMT formula in action below.

Figure 3 – PPMT formula for calculating amortisation/principal for a credit foncier repayment profile 

Sum the interest and principal, to find the total debt service. This is also shown in Figure 3 above.

Step 4: Compare the debt service amount to the CFADS. If CFADS is above debt service change the plug figure in Step 2. Repeat Step 4 until CFADS = Debt Service for at least one of the periods. 

If you come to a debt amount of 54.76, you’d be correct. Hopefully you’ll notice that this is a fairly aggressive assumption. Imagine if the period 1 CFADS wasn’t 13, but instead, was 8. You wouldn’t have enough cash to meet your debt obligations. For this reason the debt amount of 13, may be considered as the maximum debt amount you could get into this credit foncier structure, given the above assumptions. 

One last figure, which should give you a good picture of what a credit foncier repayment profile looks like. 

Figure 4 – CFADS and Debt Service for a Credit Foncier profile

As you can see in Figure 4, principal payments for credit foncier profiles increase over the period of the loan. This is due to the fact that interest is calculated on lower principal balances over the life of the loan, and hence interest paid decreases over the life of the loan. As mentioned the sum of the principal and interest in a credit foncier repayment profile stay constant over the period. 

You can also see in Figure 4 there is a large portion of excess CFADS (coloured in green) that is not utilised by debt. In most cases this probably means that the debt amount using a credit foncier repayment profile would be lower than a sculpted debt repayment profile. 

Case 2 – Target DSCR of 1.30x

Now let’s look a utilising a target DSCR of 1.30x. 

Firstly we look at calculating the target debt service for each period. We do this by rearranging the DSCR calculation to:

Target Debt Service = CFADS divided by target DSCR

Based on this formula and the cash flows we come up with a target debt service as shown in Figure 5 below.

Figure 5 – Calculating Target Debt Service

Now that we know what the Target Debt Service is in each period, let’s put in a corkscrew account This is exactly the same process as we did with the credit foncier repayment profile above. Let’s also put in a plug figure of 55.

Figure 6 – Corkscrew account with a plug figure

Based on this plug figure we can work out our interest payments for each period. We can then find our amortisation or principal payment by using the following formula.

Target Amortisation = Target Debt Service – Interest (ensure that the amortisation is not positive i.e. doesn't add to the account balance)

Figure 7 shows the calculation for target amortisation.  

Figure 7 – Calculation of target amortisation

Change the plug figure until the final balance of the corkscrew account in year 5 is 0. You should get a debt amount of 187.38.

Now let’s look at Figure 8. 

Figure 8 - CFADS and Debt Service for a Sculpted Repayment profile with target DSCR of 1.30x

Can you see the difference between Figure 4 and Figure 8? There is less excess cash after debt service when using a sculpted repayment profile compared to a credit foncier repayment profile. 

Case 3 – Target DSCR of 1.10x

We are going to let you do the last question. Simply repeat the steps that we performed in Case 2 and you should come up with an answer for the debt amount of 221. Notice that we get more debt in Company A the lower the target DSCR? 

Figure 9 - CFADS and Debt Service for a Sculpted Repayment profile with target DSCR of 1.10x

In the majority of cases, higher credit risk projects will require a higher target DSCR. This will mean that the resultant debt size will be much lower. i.e. lower debt service

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CFADS and DSCR - Words from a Foreign Language?

Some of you might be wondering whether CFADS and DSCR are words from another language. Well we’re here to explain to you that they’re not. CFADS and DSCR are acronyms which are common place in project finance deals. We’ll look at each in turn. 

NOTE: You can follow the examples by downloading the accompanying Excel spreadsheet and YouTube video in the above Blog Downloads area. 

CFADS 

Cash is KING in project finance deals and CFADS is well, the heir to the throne. 

CFADS stands for cash flow available for debt service and is usually defined in the project finance loan documentation. It is used by financiers to calculate ratios and debt sizing. 

Although it can be defined in many different ways, the simplest definition is:

•  
  • Revenues
  • less: Expenses 
  • less: Capital Expenditure during Operations(1)
  • less: Tax
  • plus/minus: Net Working Capital Movements

(1) In some instances Video Financial Modelling has seen growth capital expenditure, excluded from CFADS. The reason for this is that it is a discretionary expenditure. 

In a large number of cases project finance deals exhibit:

1. A ramp-up period post construction completion. For example think of a toll road. As soon as it is completed it does not get the predicted baseline traffic. People don’t automatically switch to using the toll road from alternate routes, it takes time. 
2. CFADS usually grows over the life of the project. This is why project finance debt is often sculpted as opposed to repayments via a credit foncier profile. We will look at sculpted and credit foncier repayment profiles in the next blog tutorial. 

In the meantime let’s take a look at an example of CFADS. 

Example

Find the CFADS given the following information:

• Revenue = 50
• Expenses = (10)
• Capital Expenditure = (15)
• Tax = (5)
• Working Capital Movements = (2) 
• Depreciation = (10)

If you got a CFADS of 18, then you’d be correct. Don’t get fooled by the depreciation, which is a non-cash movement. 

Now let’s take a look at what the DSCR is. 

DSCR

DSCR stands for Debt Service Coverage Ratio and is defined in the project finance loan documentation. In most cases it is equal to the:

CFADS divided by Debt Service 

The DSCR can be taken over a forward or backward looking period, say 6 months, or simply during one individual period.  More often than not the DSCR is calculated during the operations phase of the project only. 

Debt Service is usually defined as the aggregate of senior debt interest, repayments/principal and in some circumstances may also include other fees.

As you probably already guessed the DSCR is a measure of the amount cash flows can cover debt. The higher the DSCR, the more cash flow is available for debt financiers as a safety net.  

There are usually two benchmarks DSCR’s, defined in the project loan documentation, which are compared to the calculated DSCR. The first is the lock-up DSCR and the second is the default DSCR. 

When the calculated DSCR is below the lock-up DSCR all cash is locked up and may not be distributed to equity, until such time as the calculated DSCR is above the lock-up DSCR again.

If the calculated DSCR goes below the default DSCR, then the company would be in default and there may be many mechanisms to deal with such default, such as the lenders stepping in to perform the company’s duties, selling the project etc. The default provision is done on a project by project basis. 

Let’s take a look at an example for calculating the DSCR.  

Example

If we have the following CFADS, Interest and Principal payments what is the DSCR for each period individually and also using a look-back of two periods.  

Figure 1: CFADS, Interest and Principal

Firstly let’s work out the Debt Service:

Figure 2: Calculating Debt Service

Now let’s look at finding the DSCR for each individual period and also the DSCR for a two period look-back.

Figure 3: Individual Period DSCR

Figure 4: Two Period Look-Back DSCR

You should notice something here. There isn’t sufficient cash in period 3 despite the look-back DSCR ratio being above one. Be careful of this and make sure your financial model has a check for cash flow shortfalls. 

Hopefully this blog clears up the fact that CFADS and DSCR are not words from foreign languages. 

If you like this blog tutorial, take a look at our Intermediate financial modelling courses.

As always we’d love your feedback, so that we can continue to provide content that is relevant to you. Also check out Video Financial Modelling's website, which has plenty more free resources and great training courses.  

 

 

 

 

 

 

 

 

Calling all Excel Logical Operators

Forget telephone operators, who almost always put you on hold, today we’re talking about Excel logical operators (also called Excel logical functions).
A logical operator can simply be defined as a function that returns certain values if a logical test is true or false.
We will look at three of the key Excel logical operators; IF, AND and OR.

Note: You can follow the examples by downloading the accompanying Excel spreadshset and YouTube video.

IF
The format of the IF statement is as follows:

= IF (Logical Test, Value if logical test is true, Value if logical test is false)

The IF statement checks if a logical test is true or false and returns a certain value based on the outcome. Let’s look at an example.
Example: Below is a table with people’s dates of birth. We want to find out which of the people are over 21. Let’s assume that today’s date is 31 December 2011.
Normal 0 false false false EN-GB X-NONE X-NONE

Person	Date of Birth
Bob	31 Aug 1990
John	30 Sep 1995
Bob	31 Dec 1992
Jane	30 Jun 1984
Sally	31 Dec 1991

See the formulas for the calculation in Figure 1 below.

Figure 1: Calculation for IF Function Example
If you found that Bob (the first Bob that is) and John are the only people over 21 then you’d be correct.
AND
The format of the AND statement is as follows:

= AND(Logical Test 1, Logical Test 2...)

The AND statement returns TRUE if all the logical tests are true and FALSE if any one of the logical tests is false. Let’s look at an example.
Example: We want to find whether the date 31 May 2011 is in between 30 June 2011 and 31 December 2011.
We can see the calculation for the above in Figure 2 below.

Figure 2: Calculation for AND Function Example
If you got FALSE you’d be correct.
This may seem like an easy example but its implications are far reaching. Imagine if you had lots of dates and you wanted to find which dates are between two particular dates, a start date and an end date. I bet you could copy this formula across or down a row to find which dates meet the AND criteria.

Remember our Blog tutorial on Car Indicators – How they can help you model in Excel? We did a similar thing in that Blog tutorial.
OR
The format of the OR statement is as follows:

= OR(Logical Test 1, Logical Test 2...)

The OR statement returns TRUE if any of the logical tests are true and FALSE if all of the logical tests are false. Let’s look at an example.
Example: The below is a table with test results for two tests recently taken by students. We want to find the students that either scored over 75% in one test or had an average of more than 65%.

Person	Test 1 (%)	Test 2 (%)
Bob	76.00%	65.00%
John	53.00%	74.00%
Bob	67.00%	65.00%
Jane	45.00%	65.00%
Sally	65.00%	60.00%

See Figure 3 for the OR calculation.

Figure 3: Calculation for OR Function Example
You'll notice that both the Bob's met the criteria.
If you like this article, there are plenty more tips, tricks and worked examples in our Excel Functions training course.
Check out our Excel and Financial Modelling training courses.

Excel NPV Function

What is an NPV?
Simply put an NPV or net present value is a way of determining an investment or projects value. It is probably the most often used formula for financial decision making. The below tutorial takes you through:

•  An introduction to present value
•  The decision to accept or reject a project based on NPV
•  The Excel XNPV function
•  Putting it all together – some examples

Present Value Introduction
Before we delve into the depths of NPV, we should first understand what a present value or PV is. Imagine that you were to receive $100 from the bank in five years time (unlikely I know). You know that the interest rate from the bank during that period of time is going to be constant at 5%. What is that $100 value today?
Think of investing an unknown amount y, for 5 years at 5%. We know that the first year we would get y x 5% in interest plus still have our principal y. i.e. we would have y x (1+5%). If we re-invest our interest and principal of y x (1+5%) for another year we would get y x (1+5%) x (1+5%) or y x (1+5%)².
As you can imagine the pattern repeats itself until we get to year 5, where we have y x (1+5%)⁵. Hence if we want $100 in five years time by investing y then the following relationship would have to hold.

100 = y x (1+5%)⁵

Rearranging this formula would bring about y = 100/(1+5%)⁵. Wow, look what just happened, we derived the PV formula.
Type the equation in the calculator and you get y = $78.3
NPV is simply an extension of the PV, taking into account your initial investment. Say for example we had an initial outlay of $50 and in return we got $100 in five years time. The NPV would be the PV of future cash flows (i.e. the PV of $100 or $78.3) less the initial investment at time zero ($50), or $28.3.
So what does that value mean?
The decision to accept or reject a project
Basically put if a project has a positive NPV then we should accept the project. The below outlines the accept reject decision.

•           NPV >0 – accept the project
•           NPV = 0 – indifferent between accepting and rejecting the project
•           NPV <0 – reject the project

In summary we should accept a positive NPV project because it adds value to our company.
NOTE: Some of you sharp tacks may be thinking. What happens if you have multiple projects with positive NPVs but only have a restricted budget? Well that is a topic for another week and relates to capital budgeting restrictions.  
The Excel XNPV function
As pointed out by Chandoo.org and Navigator Project Finance there are some limitations to the NPV function in Excel. Some of the main limitations include:

1)      The cash flows are at the end of the year (even your initial investment which is meant to occur at t=0); and

2)      cash flows must be equally spaced apart.

As a result of these limitations Video Financial Modelling prefers to use Excel’s XNPV function. Don’t be too worried, the Excel XNPV function is similar NPV function, but with one extra input, dates. The XNPV function looks like:
XNPV (rate, values, dates)
Let’s look at some examples for the Excel XNPV function.
Putting it all together – Some Examples
You can follow the examples by downloading the Excel spreadsheet and watching the following YouTube video.
Example 1
Let’s firstly look at the example we introduced in the Present Value Introduction. Imagine that the current date is 31 December 2011 and we want to find the present value of $100 given to us in 5 years time if we use a discount rate of 5%.
See Figure 1 for the XNPV calculation.

Figure 1: XNPV formula for Example 1


If you've done this correctly you should get a value of $78.3.
Example 2
You are thinking of investing in a machine. On 31 December 2011 the machine costs $150, and you require a return of 10%. If you have the following cash flows, would you invest in the machine?

•           31 December 2012: $50
•           31 December 2013: $40
•           31 December 2014: $70
•           31 December 2015: $10

Figure 2 shows the calculation for the above example.

Figure 2: XNPV formula for Example 2
Using Excel we come to the following conclusion, the net present value of the cash flows is -$12. If we use the decision rules we established in the last section we would reject the project as it has a negative NPV.
If you’re still struggling with the NPV concept check out some of these great links.

•           Wikipedia
•           Chandoo.org
•           Navigator Project Finance
•           (Note: don’t get bogged down with the nominal to real rate calculation in this video).

Like this article? Check out the Excel and Financial Modelling Training Courses at Video Financial Modelling.