https://www.educorporatebridge.com/financial-modeling/types-of-financial-model/ Learn the different types of Financial model like DCF Model, Comparative Company Analysis model, Sum-of-the-parts model, LBO Model, M&A model and Option Pricing Model

1. Types of
Financial Models
~ By edu CBA

2. What is a Financial Model?
• A financial model is a mathematical representation of the
financial operations and financial statements of a company. It is
used to forecast future financial performance of the company
by making relevant assumptions of how the company would
fair in the coming financial years.
• It is a risk management tool for analyzing various financial and
economic scenarios and also provided valuations of assets.
• These models involve calculations, analyzing them and then
provide recommendations based on the information gathered.

3. Types of Financial Models
Comparative Company Analysis model
Sum-of-the-parts model
Discounted Cash Flow Model
Merger & Acquisition (M&A) model
Leveraged Buy Out (LBO) model
Option pricing model

4. Discounted Cash Flow model
• DCF is based upon the theory that the value of a business
is the sum of its expected future free cash flows,
discounted at an appropriate rate.
• Investors particularly use this method in order to evaluate
the potential of an investment and estimate the absolute
value of a company.
Merger & Acquisition (M&A) model
• The entire objective of merger modeling is to show
clients the impact of an acquisition to the acquirer’s
EPS and how the new EPS compares with the status
quo.
•
In simple words we could say if the new EPS is higher,
the transaction will be called “accretive” while the
opposite would be called “dilutive.”

5. Comparative Company
Analysis model
•
•
Also referred to as the
“Comparable” or “Comps”, it
is the one of the major
company valuation analyses
that is used in the investment
banking industry.
In this method we undertake
a peer group analysis under
which we compare the
financial metrics of a
company against similar firms
in industry.
Leveraged Buy Out (LBO)
model
•
Leverage buy out deal involves
acquiring another company
using a significant amount of
borrowed funds to meet the
acquisition cost.
•
This kind of model is being used
majorly in leveraged finance at
bulge-bracket investment banks
and sponsors like the Private
Equity firms who want to
acquire companies with an
objective of selling them in the
future at a profit.

6. Option pricing model
•
•
Option traders tend to utilize different
option price models to set a current
theoretical value.
Option Price Models use certain fixed
knowns in the present and also
forecasts for factors like implied
volatility, to compute the theoretical
value for a specific option at a certain
point in time.
Sum-of-the-parts model
•
It is also referred to as the break-up
analysis.
•
This modeling involves valuation of
a company by determining the
value of its divisions if they were
broken down and spun off or they
were acquired by another company.

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