IIMS Journal of Management Science
Year : 2010, Volume : 1, Issue : 1
First page : ( 1) Last page : ( 26)
Print ISSN : 0976-030X. Online ISSN : 0976-173X.

Constructing Consistent Financial Planning Models for Valuation

Vélez-Pareja Ignacio

JEL CLASSIFICATION: D6, E47, G31, H43

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 formulae 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 twofold: 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. Keeping track of value creation is a major duty of management and this can be done with the proposed model. The model exhibits 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.

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Key words

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

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