Models
Model standards & formulas
A model is a claim you can defend. These standards keep every model you build honest, and these formulas are the ones you must know cold for the final assessment.
The model standard
Six rules govern every model you build in this program. A model that breaks these rules is a failed deliverable, however good the answer looks.
One source of truth
Every input lives in a single assumptions block. No hard-coded numbers in the middle of a model. Change an assumption once and the whole model updates.
Clean color discipline
Blue for inputs, black for formulas, and a distinct color for links to other sheets. Anyone should be able to open the model and know what to touch.
The model balances
The balance sheet always balances, in every period and every scenario. If it does not, the model is wrong, not the accounting.
Circular references are explicit
Interest and cash-flow circularity is handled deliberately, with iterative calculation on and a documented break, never accidentally.
Every output is traceable
You can click from any output back to the driver that produced it. A number you cannot trace is a number you cannot defend.
One page of defense
Every model ships with a one-page note stating the assumptions, the key drivers, and the three risks that would break the thesis.
Core formulas
The formulas that do the work. You should be able to write each one from memory and explain the assumption hiding inside it.
Unlevered Free Cash Flow
Cash available to all capital providers before financing decisions.
Weighted Average Cost of Capital
Discount rate for unlevered cash flows, weighted by target capital structure.
Cost of Equity (CAPM)
Risk-free rate plus a risk premium scaled by the asset's systematic risk.
Unlevered Beta (Hamada)
Removes the effect of leverage so betas are comparable across capital structures.
Terminal Value - Perpetuity Growth
Assumes a constant growth rate into perpetuity; sensitive to both g and WACC.
Terminal Value - Exit Multiple
Prices the terminal period at a market multiple; must be consistent with the perpetuity.
Enterprise Value
The value of the operating business before capital structure.
Equity Value
Enterprise value adjusted for the claims that sit ahead of equity.
Sponsor IRR
The discount rate at which sponsor cash flows net to zero over the hold.
Multiple on Invested Capital
A simple return measure that ignores timing; pair it with IRR.
Accretion / Dilution
Whether the deal raises or lowers EPS per share after financing.
Common model errors
The mistakes that break more models than any single technique. Audit every deliverable against this list before you hand it in.
| Error | Why it matters | The fix |
|---|---|---|
| Hard-coded inputs | Untraceable, un-updatable numbers | Route everything through the assumptions block |
| Unbalanced balance sheet | The model is internally inconsistent | Check that assets equal liabilities plus equity in every period |
| Wrong discounting convention | Value is mispriced by half a year or more | Apply end-year or mid-year consistently and state it |
| Terminal value dominates | The answer is the assumption, not the model | Cross-check with an exit multiple and disclose the share of value |
| Ignored circularity | Interest and cash flows disagree | Turn on iteration and document the break |
| No scenario testing | A single point masquerades as a range | Build base, bull, and bear from the same assumptions block |