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Unified Financial Analysis Risk & Finance Lab

Unified Financial Analysis Risk & Finance Lab. Chapter 17: Non-Financials Willi Brammertz / Ioannis Akkizidis. Financial vs. non-financial industry I. Financial vs. non-financial industry II. Banks. Producing Industry. Balance Sheet Assets Liabilities. P&L Cost Reven.

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Unified Financial Analysis Risk & Finance Lab

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  1. Unified Financial Analysis Risk & Finance Lab Chapter 17: Non-Financials Willi Brammertz / Ioannis Akkizidis

  2. Financial vs. non-financial industry I

  3. Financial vs. non-financial industry II Banks Producing Industry Balance Sheet Assets Liabilities P&L Cost Reven. Balance Sheet Assets Liabilities P&L Cost Reven.

  4. Financial vs. non-financial industry III • Financial contract contains a full investment cycle (cash-out and –in) • An investment for example, describes only cash-out • Investment, running cost and revenues have to be modeled separately (and not on a single contract!)

  5. Modeling non-financial industries

  6. Balance Sheet, P&L and Cash-Flows • Real observable is only cash-flow • BS and P&L are derived from cash flow in reality • Financial thinking however starts with BS and P&L • UfA starts strictly with cash flows, either • Physical units * price per unit or • Paid amount • BS and P&L are derived by rules BS CFL P&L

  7. Modeling examplesInvestment, cost and sales

  8. Risk sources • Market • Credit • Operational • Core market

  9. Financial side of non-financials • Cash surplus must be parked • Cash deficit must be financed • Balancing mechanism (= Treasury) can take care of it!

  10. Base simulation technique • Base simulation technique does not change • Primary source of simulation: Cash flows • All other measurements must only be derivations of the cash flow!

  11. Benefits • Unmatched consistency and full integration between balance sheet, P&L and cash flows • On traditional accounting basis • IFRS • Allows planning under uncertainty • Integration of financial and business risk • Full valuation support

  12. Valuation under going concern principles • Value of a non-financial firm (even true for financial firms) derives much more from the future possibilities than the assets on the balance sheets. • Dynamic simulation is the basis • Possible to generate the cash flows for n years directly

  13. Valuation under going concern principles I • Financial • Net present value of non-operating financial assets (FVNOA). • Market value of debt (FVD). • Operating • Free cash flow (OVFCF • Terminal value (OVTV including growth option (OVGO))

  14. Valuation under going concern perspective II • Note: If model is balanced all cash flow getsreinvested and thus is included in FVNOA or FVD! • However: Dividend payments have to be added to the value calculation • Value can be calculated at tE or tB (using discounting) as needed

  15. Valuation under going concern principles III • After a dynamic simulation, all elements are ready available • FVNOA/FVD: Take the value found in the NOA (D) class at the end of the simulation interval and discount. • OVFCF: in the case of full balancing, there is no free cash flow, all is either in FVNOA or FVD: It is however possible to withdraw cash flows besides the normal operational cost. These cash flows can be separated. • OVTV : Either it would be possible to make a very long term simulation after which OVTV including OVGO could be dropped or the profit of the last interval could be used to derive a termination value using standard formulas.

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