Financial Modeling and Valuation: A Practical Guide to Investment Banking and Private Equity

by Paul Pignataro

Written by the Founder and CEO of the prestigious New York School of Finance, this book schools you in the fundamental tools for accurately assessing the soundness of a stock investment. Built around a full-length case study of Wal-Mart, it shows you how to perform an in-depth analysis of that company's financial standing, walking you through all the steps of developing a sophisticated financial model as done by professional Wall Street analysts. You will construct a full scale financial model and valuation step-by-step as you page through the book.When we ran this analysis in January of 2012, we estimated the stock was undervalued. Since the first run of the analysis, the stock has increased 35 percent. Re-evaluating Wal-Mart 9months later, we will step through the techniques utilized by Wall Street analysts to build models on and properly value business entities.Step-by-step financial modeling - taught using downloadable Wall Street models, you will construct the model step by step as you page through the book. Hot keys and explicit Excel instructions aid even the novice excel modeler. Model built complete with Income Statement, Cash Flow Statement, Balance Sheet, Balance Sheet Balancing Techniques, Depreciation Schedule (complete with accelerating depreciation and deferring taxes), working capital schedule, debt schedule, handling circular references, and automatic debt pay downs. Illustrative concepts including detailing model flows help aid in conceptual understanding. Concepts are reiterated and honed, perfect for a novice yet detailed enough for a professional. Model built direct from Wal-Mart public filings, searching through notes, performing research, and illustrating techniques to formulate projections. Includes in-depth coverage of valuation techniques commonly used by Wall Street professionals. Illustrative comparable company analyses - built the right way, direct from historical financials, calculating LTM (Last Twelve Month) data, calendarization, and properly smoothing EBITDA and Net Income. Precedent transactions analysis - detailing how to extract proper metrics from relevant proxy statements Discounted cash flow analysis - simplifying and illustrating how a DCF is utilized, how unlevered free cash flow is derived, and the meaning of weighted average cost of capital (WACC) Step-by-step we will come up with a valuation on Wal-Mart Chapter end questions, practice models, additional case studies and common interview questions (found in the companion website) help solidify the techniques honed in the book; ideal for universities or business students looking to break into the investment banking field.

Genres: Finance, Business, Economics, Nonfiction, Textbooks

432 pages, Kindle Edition

First published June 18, 2013

Reviews

[Migél · Rating 5 out of 5]

freak in the (excel) sheets 🥱👍

[Matias Alanko · Rating 4 out of 5]

Very detailed book on modeling. I was surprised that the book explained the basics of accounting and finance in such a way that no prior knowledge was required. The book is quite a heavy read, however, mainly due to the frequent case examples and actual modeling tips. The website included also had value for me. The only drawback I have is that the case chosen did not force one to do some harder things, and thus they weren't shown in the book, and forecasting was mainly done on the basis of history or analyst expectations. Particularly towards the end the author seemed to dwell on completely meaningless details (like possible contents of the "other" items on the income statement totaling 50mil for a company with dozens of *billions* in revenue) while quickly going through others (many valuation related concepts). An example of the stereotypical Wall Street analyst syndrome of missing the forest for the trees in other words. Still worth 4 stars though, particularly for beginners.

[Spencer Kimber · Rating 4 out of 5]

Straight forward, to the point, explanation of financial modeling and valuation that explains the "why" behind all the topics necessary to make a quantitative analysis.

[Tino · Rating 4 out of 5]

An impressive amount of knowledge crammed into this one. It’s pretty heavy as an actual guide but valuable as a textbook as well. The case study coupled with the webpage provided a pretty good learning experience, even if somewhat basic. 4 stars.

[Johntrik · Rating 2 out of 5]

In my humble opinion this is a horrible book. There is zero connection between the expectations created from the title and description with the actual contents. It is centered around creating a complete "model" and valuation of Amazon, and I'm really not sure what audience this book is aimed at.

It provides tips and tricks for Excel while building the "model", tries to explain basic accounting and how the three financial statements work—the balance sheet chapter starts with the definition of what an asset is and distinguishes current from long-term assets/liabilities. How can someone who doesn't know basic definitions even begin to build a model? The book is all over the place. If you remove "Amazon" from the text you probably won't even be able to guess what kind of company we're "modeling" throughout 400 pages.

The approach is utterly naive and 100% not the standard on the "Street". The first step is making revenue projections in the income statement. How? The book tells us to fire up Yahoo Finance and look at analyst estimates. That's it. That's the revenue estimation for the final "model". Most items are estimated using one of the following "seven methods of projection": Conservative (maximum of past three years), Aggressive (minimum of past three years), Average, Last year, Repeat the cycle, Year-over-year growth, or Project as a percentage of another line item.

No revenue schedule, no cost schedule. Just choose one method and print it out. How is the selection made? Completely arbitrary. If numbers were kinda close during the last three years, take the average. If they were all over the place, choose method 5—copy the last three years' values and paste them into the projected years. After every naive projection comes something like: "It is safe to say this line does not have a large impact on the overall valuation, so we can keep this assumption for now and tweak later if needed."

Can you guess what this means? After our "model" is complete, we fire up Yahoo Finance again, and if our bottom line differs dramatically from what actual analysts estimated, we just start tweaking random parts until we achieve a bottom line in the Yahoo Finance range. Why are we even trying to create a model? Just take the stock price analysts estimated and call it a day.

Another issue is that this second edition has no reason for existence—it's a total money grab. Nothing new compared with the first edition which "models" Walmart, but it's missing parts because of Amazon's nature. Amazon doesn't pay dividends and you want to model them? "Refer to my first edition of the book." Want to know about accelerated depreciation? "Please refer to the first edition book on Walmart." Line items don't match up? "See my book on Walmart for an example."

The funniest part is probably the definition of Goodwill: "Goodwill is an intangible asset that typically arises as a result of an acquisition. See my book titled Mergers and Acquisitions for a more robust explanation on goodwill. Let's list this as a separate item. So we can hardcode $14,754 and $15,017 into 2019 and 2020, respectively." It's absent. Pignataro could have explained in that line that goodwill reflects the premium paid above net asset value, but no—he wants you to buy another book, which will probably be as useless as this one. He explains MACRS tax depreciation briefly, but Goodwill is too much for a book about investment banking and private equity?

If you show this "model" to someone and they ask a single "why?" your best bet is to leave the room crying. The assumptions are inexplicable and the results based on Yahoo Finance. Same for the valuation process—very shallow material starting with simple definitions like the present value of a cash flow.

Who is this book aimed at? Someone who knows nothing about the subject and wants to model a public company. Why would they read this book? They won't be able to model anything after it. They'd need to first read about financial statement analysis, then take a proper modeling course with actual good practices. You can't learn accounting, financial statement analysis, Excel, modeling and valuation in 400 pages written by Paul Pignataro.

You could have gotten actual good modeling practices if half the book wasn't dedicated to Excel sheets covering page after page with basic operations step-by-step—even though all Excel material is provided for download anyway.

The sections covering Depreciation Schedule, The Debt Schedule, Circular References and Operating Working Capital offer some decent starting points and understatement of how these processes take place. Also, most excel tips are really useful but they are just excel tips, not modeling tips. What's the point?

[Augusto Alves · Rating 4 out of 5]

This is a great book for undergrads, trying to break into the finance industry. It guides you step-by-step through a complete valuation of Walmart, teaching both the conceptual and practical part. I'd just make it clear that while this is a good starting point, it is by no means profound and you should still have a hard time doing valuations later.

[Stan Koko · Rating 4 out of 5]

Książka zawiera bardzo zrozumiale opisane podstawy finansów. Gdyby obciąć tabele na kilka stron, wpisy o tym jakie formuły zastosować w Excel to pewnie miałaby sto stron i byłaby doskonałym źródłem podstawowej wiedzy o RZiS, Cashflow czy bilansie.

[Nicholas Stubbs · Rating 4 out of 5]

Creating shareholder value in private equity