FNCE 6480 -- Financial Modeling

Fall 2009
Combex III
Due: Monday, October 5
Online dropbox basket: Unit 3: Combex III
Campus Blackboard folder: Unit 3\Assignments\Combex III
This is a quasi pass/fail problem. No memo is required

Statement of Cash Flows

Modular solutions
Perverse effects
Simple valuation

Introduction to Phase III and following

This phase of the Combex problem, and the three that follow it, builds on the relatively
simple set of financial statements for Combex Corp that you constructed in phases I – II.
These statements are currently solved using a mini-financing module. (You’ll find the
base workbook for this phase in the Unit 3\Work-in-class folder on Blackboard.) This
phase asks you to add the basic modules of a financial statement simulation model to
Combex. Phase IV introduces three cash control decision variables that add greater
flexibility to the modeler’s ability to control how the firm uses cash. Phase V extends the
valuation module to reflect dilution and the attributes of a mature firm. Finally, phase VI
adds Monte Carlo simulation. The material covered in these phases parallels the
challenges you will face in problems 4 and 5.

Phase III

Completing the financial statements

Phase III begins where phase II left off. First, complete the set of financial statements by
adding a formal Statement of Cash Flows to the Combex financial statement simulation
model you built in phase I. Be sure to include a check to make sure it balances.

Adding modules
You now have a financial statement simulation model for Combex Corporation that has
been solved externally using a mini-financing module. The next step is to convert this
model to a fully modular model by adding the following modules: Investment, Financing
(that allocates any required external financing between debt and equity), Cash Flow (that
pays out excess cash as a special dividend), and Valuation (aggregate equity only).
The Financing Module warrants a closer look. Use the two-line version for Required
External Financing that returns a positive value for Required External Financing when it
is positive (and zero otherwise) and a positive value for Excess Cash when required
external financing is negative (zero otherwise). Use debt_portion to allocate Required
External Financing between issuing debt and issuing equity, making sure to link your

FNCE 6480 – Unit 3: Combex III – page 1

balance sheet with the debt issued and equity issued lines. (For this phase, set
debt_portion to one.)
Once your modular model balances, add a Performance Sector that tracks ROA, ROE,
g*, PRAT, and their components.1 Use the minimum of PRAT in year 5 or 5%
(=MIN(PRAT, 0.05)) as the long term growth rate in your terminal value calculation.2
There are only 2 decision variables (payout and debt_portion) and 1 sensitivity variable
(growth) for this model. Make sure your modular model balances and remains logical
under extreme growth scenarios (-30% and +50%). Depreciation expense should go to
zero as net fixed assets go to zero, net fixed assets should never go negative, and the
dividend should never go negative. You’ll find the adjustments necessary to prevent
these perverse effects in section 3-1 of Unit 3.

What you turn in

Please post your finished workbook to the dropbox basket or folder given in the heading
for this assignment. No memo is required. If you want to get started early on Combex
IV, send me your finished workbook via email and I’ll send you the base workbook for
Combex IV with solutions.

1
Calculate ROA and ROE based on contemporaneous values for EBIT, net income, assets, and equity;
calculate PRAT use lagged equity.
2
There is no theory to help us choose the appropriate long-term (aka terminal) growth rate, other than that
the rate must be sustainable (no greater than g* or PRAT) and no greater than the growth rate of the
economy. For this phase of the Combex problem, I have assumed that the economy’s long-term growth
rate is 5% and arbitrarily determined that PRAT is the appropriate long-term growth rate, provided it is less
that 5%. Later in the semester, I will use the average of g* and PRAT to forecast the terminal growth rate.

FNCE 6480 – Unit 3: Combex III – page 2