CAPITAL CITY CORPORATION: A CASE STUDY IN FINANCIAL
ANALYSIS AND FORECASTING FOR SHAREHOLDER VALUE CREATION
Robert Irons
Associate Director for Financial Analysis
AT&T Telecommunications
2000 West SBC Center Drive
Hoffman Estates, IL 60196
847.248.4480 / [email protected]
Robert A. Weigand*
Professor of Finance and
Brenneman Professor of Business Strategy
Washburn University School of Business
1700 SW College Ave., Topeka, Kansas 66621
785.670.1591 / [email protected]
_______________________________________________________________________________
Abstract
A firm's senior management team must reach a consensus regarding key strategic decisions
available to the company. A comprehensive financial analysis of the firm's past
performance and future prospects is necessary to determine the best course of action for the
firm. Most of the conceptual and analytical material covered in a one-semester Financial
Management class are used to quantitatively justify the final decision. The case specifically
highlights the need to extend management's evaluation horizon when making long-term
strategic decisions. Another innovative aspect of the case is the use of the MSN Money
Central financial statement formats, which means the required spreadsheet models can be
used to perform the same financial analysis and financial statement forecast on any
publicly-traded company. The conceptual complexity and extensive spreadsheet modeling
required to solve the case make it an appropriate term project for undergraduate seniors or
MBAs.
JEL Classification: (I22) Financial Education
Keywords: Financial Analysis and Forecasting, Capital Budgeting, Shareholder Value
_______________________________________________________________________________
January 2006
Under review at Journal of Finance Case Research
*
Corresponding author.
CAPITAL CITY CORPORATION: A CASE STUDY IN FINANCIAL
ANALYSIS AND FORECASTING FOR SHAREHOLDER VALUE CREATION
Robert Irons, AT&T Telecommunications
Robert A. Weigand, Washburn University
A firm's senior management team must reach a consensus regarding key strategic
decisions available to the company. A comprehensive financial analysis of the firm's past
performance and future prospects is necessary to determine if restoring the firm's financial
ratios to recent levels creates the maximum possible value for shareholders, or if more value
would be created by simultaneously investing in a major new project. Decision criteria for the
case include traditional accounting metrics (return on assets, return on equity, earnings per
share and dividends per share) as well as value creation metrics such as net operating profit
after tax, return on invested capital, economic value added, and market value added. Most of the
conceptual and analytical material covered in a one-semester Financial Management class is
used to arrive at and justify a final decision. The case highlights the need to extend
management's evaluation horizon when making long-term strategic decisions. Another
innovative aspect of the case is the use of the MSN Money Central financial statement formats,
which means the required spreadsheet models can be used by students and faculty to conduct the
same financial analysis and financial statement forecasts for any publicly-traded company. The
conceptual complexity and extensive spreadsheet modeling required to solve the case make it an
appropriate term project for undergraduate seniors or MBAs. The case is designed so that
smaller segments can be introduced over several class sessions. Expected time to complete the
case analysis is 18-24 hours of outside class time.
Capital City Corporation is a U.S.-based manufacturing firm that produces home
improvement products for the consumer market. Having incorporated in January of 1992, the
firm has just completed its thirteenth full year in business. Based on three years of strong growth
in sales and profits, the firm's board decided to go public in 1995. Capital City's IPO stock price
was $10.00 per share, and over the next few years the price of their stock climbed as high as
$20.00. Since 2001, however, the firm's share price has been hovering between $12-$13 per
share, with a current market capitalization of equity of approximately $58 million. Market
analysts have recently been critical of Capital City's management team, pointing out the firm's
lack of growth and management's inability to create shareholder value.
Financial statement analysis shows that profit margins have been declining since 2001, as
have return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC).
Although Capital City has positive net operating profit after tax (NOPAT), economic value
added (EVA), and free cash flow (FCF), these items have exhibited no growth in recent years.
(Capital City's 2000-2004 financial statements are presented in Exhibits 1 and 2.)
The firm's executives are divided regarding the best course of action. The Sales and
Marketing managers believe shareholders would be best served if Capital City focused on a
straightforward restructuring that would restore the firm's operating and financial ratios to their
average values from 2001-2004 (see Exhibit 3 for the operating ratios used to forecast Capital
1
City's pro forma financial statements, based on the common-size financial statements approach).
Their analysis confirms that restoring the firm's recent operating and financial ratios would result
in growth in earnings and dividends per share, and improve key metrics such as ROA, ROE,
ROIC, and EVA. Moreover, the firm would generate greater free cash flow that could be used to
increase dividends, repurchase shares, or continue paying down debt, which has been declining
in recent years.
The Operations and Finance managers, on the other hand, argue that the restructuring
alone will not provide sufficient growth to satisfy markets and analysts. Their position is that, in
addition to the restructuring, the firm needs to upgrade manufacturing processes in key product
lines to increase capacity and allow for growth in sales. Their analysis shows this investment
(details provided in Exhibit 4) will further improve the firm's performance metrics in the
intermediate term, as well as demonstrate to analysts that Capital City is committed to growth
and increasing shareholder value. The Sales and Marketing managers are opposed to this
proposal because the investment will be entirely funded with a large amount of debt due to the
cost of bringing the new technology on board. This group's analysis also shows that many of the
firm's key performance metrics worsen if the firm invests in the project. The Operations and
Finance managers counter that the Sales and Marketing managers are focusing exclusively on the
short term, and remain convinced that the firm's performance metrics and stock price will
substantially improve after several years if the new project is adopted. They argue that this is the
same focus on the short term which has contributed to the firm's poor performance in recent
years. They also assert that if management cannot prove to the market that Capital City is
capable of growth, their firm may become the target of an unwanted takeover offer.
Both groups of managers agree that before they can determine which approach is in the
best interest of Capital City's shareholders, a thorough financial analysis of the firm's recent
performance and forecasted performance under the different scenarios is required. Capital City's
board of directors has requested that managers hire an outside consulting firm to assess the firm's
current position and make recommendations for a value creation strategy likely to have the most
positive influence on the company's stock price and performance metrics. They have specifically
commissioned the following tasks:
1. Perform a complete financial analysis of the firm for the period 2001-2004, using the
data provided in Exhibits 1 and 2.
a. Report all the metrics shown in Exhibit 5, including an estimate of the
intrinsic value of Capital City's stock price at year-end 2004 using a growing
perpetuity of FCF model, e.g., Value04 = [FCF04 × (1+g)]/(WACC−g).
b. Use a long-term growth rate of 5% and the current WACC (which you are
required to compute based on inputs provided in Exhibits 1 and 4) in the
intrinsic valuation model.
c. Create a separate spreadsheet tab that shows the weighted average cost of
capital (WACC) components and how the WACC was calculated.
d. Include an estimate of the firm's market-value added (MVA), using the
intrinsic value of the firm's stock from the FCF valuation model as the market
value of the firm.
e. Comment on the most relevant trends (positive and negative) in Capital City's
financial ratios and valuation metrics (see Exhibit 8 for a glossary of the
calculations used in the analysis).
2
2. Forecast Capital City's balance sheets, income statements, and financial metrics (see
Exhibit 6) for the years 2005-2008.
a. Assume the future financial forecasting ratios (provided in Exhibit 3) are
restored to their average values from 2001-2004 (based on the restructuring
plan suggested by the Sales and Marketing managers).
b. When creating the pro forma balance sheets, calculate the additional funds
needed (AFN), and comment on how funding needs will be met, or surplus
funds will be allocated. (Issuing new equity is not an option, as both groups of
managers agree that any dilution to the stock price would be undesirable.)
c. Capital City has a policy that limits total short-term debt to $2.5 million —
any funds required over this amount must be raised as long-term debt.
3. Perform a complete analysis of the pro forma financial statements 2005-2008 (as in
step #1).
a. Include a new estimate of the value of the firm as of year-end 2004 using a
discounted FCF model based on the pro forma FCF projections 2005-2008.
Use a 5% long-term growth rate for the valuation model (for cash flows
beyond 2008).
b. Also include an MVA calculation, using the intrinsic value of the firm's stock
from the FCF valuation model as the market value of the firm.
c. Comment on the most relevant trends observed in the forecasted metrics.
4. Conduct a complete capital budgeting analysis of Capital City's new investment
project proposal (details provided in Exhibit 4, MACRS depreciation tables provided
in Exhibit 7), including forecasts of incremental revenue, expenses, earnings and
after-tax cash flows. Report the project's payback period, discounted payback period,
NPV, IRR and MIRR (assume the reinvestment rate is equal to the WACC).
5. Provide a second forecast of Capital City's financial statements, this time including
the expected effects of the new project.
a. As in step #2 above, forecast Capital City's balance sheets, income statements,
and financial metrics for the years 2005-2008 including the effects of
investing in the new project on revenues, expenses, assets, etc.
b. Assume that the increase in expenses related to the project is split evenly
between Cost of Sales and SG&A on the pro forma income statements.
6. Perform a complete financial analysis of the firm for the period 2005-2008 as in step
#3 above, this time including the effect of the new project on the firm's performance
metrics and per share intrinsic value.
a. As before, assume a 5% growth rate for the valuation model.
b. Include an MVA calculation, using the intrinsic value of the firm's stock from
a FCF valuation model as the market value of the firm.
c. Comment on the most relevant trends (positive and negative) in Capital City's
pro forma financial ratios and valuation metrics compared with those in step
#3 (the pro forma analysis without investing in the new project).
7. Provide a final recommendation regarding the best course of action for the firm based
on the analysis performed in steps 1-6 above. Although the project's NPV, IRR, etc.
should influence your final recommendation, you must also provide a detailed
commentary regarding all of the firm's performance metrics under both scenarios.
3
Exhibit 1. Capital City Corporation Balance Sheets 2000 – 2004
Fiscal Year Ending Dec 31 (thousands) 2004 2003 2002 2001 2000
Assets
Current assets
Cash and equivalents 3,438.4 3,110.8 1,664.6 2,188.1 1,919.4
Receivables 4,070.6 3,878.3 3,105.5 2,558.0 2,243.9
Inventories 2,231.1 2,075.8 1,899.9 1,653.0 1,450.0
Other Current Assets 4,494.3 4,313.6 4,411.7 3,918.8 3,437.5
Total current assets 14,234.4 13,378.5 11,081.7 10,317.9 9,050.8
Non-Current assets
Property and equipment, gross 19,949.6 16,402.2 12,840.1 10,133.7 7,989.5
Accum. Depreciation and Depletion 8,804.7 7,247.8 4,986.0 4,194.6 3,670.9
Property and equipment, net 11,144.9 9,154.4 7,854.1 5,939.1 4,318.6
Intangibles 7,056.7 6,675.8 5,318.2 5,014.9 4,399.1
Other Non-Current Assets 4,796.5 3,753.9 2,923.0 2,279.3 1,759.5
Total Non-Current Assets 22,998.1 19,584.1 16,095.3 13,233.3 10,477.2
Total assets $37,232.5 $32,962.6 $27,177.0 $23,551.2 $19,528.0
Liabilities and stockholders' equity
Current liabilities
Accounts payable 3,114.8 2,873.0 2,082.8 1,568.0 1,375.4
Short-term Debt 1,314.7 1,626.4 745.3 1,859.2 2,250.0
Other Current Liabilities 5,017.5 4,248.2 3,284.9 2,394.1 2,249.2
Total current liabilities 9,447.0 8,747.6 6,113.0 5,821.3 5,874.6
Non-current liabilities
Long-term debt 5,308.2 5,701.3 5,701.3 5,701.3 5,701.3
Deferred income taxes 0.0 0.0 0.0 0.0 0.0
Other non-current liabilities 0.0 478.4 1,092.5 1,842.7 1,696.7
Minority interest 0.0 0.0 0.0 0.0 0.0
Total non-current liabilities 5,308.2 6,179.7 6,793.8 7,544.0 7,398.0
Total liabilities 14,755.2 14,927.3 12,906.8 13,365.3 13,272.6
Stockholders' equity:
Preferred Stock 0.0 0.0 0.0 0.0 0.0
Retained Earnings 4,442.0 3,765.1 4,084.3 3,930.5 3,752.5
Common Stock 18,035.3 14,270.2 10,185.9 6,255.4 2,502.9
Total stockholders' equity 22,477.3 18,035.3 14,270.2 10,185.9 6,255.4
Total liab. and stockholders' equity $37,232.5 $32,962.6 $27,177.0 $23,551.2 $19,528.0
Shares Outstanding (thousands) 4,500 4,500 4,500 4,500 4,500
4
Exhibit 2. Capital City Corporation Income Statements 2000 – 2004
Fiscal Year Ending Dec 31 (thousands) 2004 2003 2002 2001 2000
Sales Revenue 28,214.9 24,218.8 20,878.3 18,234.3 15,995.0
Cost of sales 13,845.8 11,349.1 9,302.5 7,625.0 6,250.0
Gross Operating Profit 14,369.1 12,869.7 11,575.8 10,609.3 9,745.0
Selling, General and Administrative Exp. 5,524.0 4,834.1 3,535.6 2,898.0 2,415.0
Other taxes 0.0 0.0 0.0 0.0 0.0
EBITDA 8,845.1 8,035.6 8,040.2 7,711.3 7,330.0
Depreciation and Amortization 1,556.9 1,365.7 1,187.6 1,023.8 875.0
EBIT 7,288.2 6,669.9 6,852.6 6,687.5 6,455.0
Other income (net) 0.0 0.0 0.0 0.0 0.0
Total Income available for interest expense 7,288.2 6,669.9 6,852.6 6,687.5 6,455.0
Interest expense 576.3 635.1 569.0 652.6 681.9
Minority interest 0.0 0.0 0.0 0.0 0.0
Pre-tax income 6,711.9 6,034.8 6,283.6 6,034.9 5,773.1
Income taxes 2,269.9 2,269.7 2,199.3 2,104.4 2,020.6
Special Income/Charges 0.0 0.0 0.0 0.0 0.0
Net Income from Continuing Operations 4,442.0 3,765.1 4,084.3 3,930.5 3,752.5
Net Income from Discontinued Operations 0.0 0.0 0.0 0.0 0.0
Normalized Income 4,442.0 3,765.1 4,084.3 3,930.5 3,752.5
Extraordinary Income 0.0 0.0 0.0 0.0 0.0
Income from Cum. Effect of Acct Changes 0.0 0.0 0.0 0.0 0.0
Income from Tax Loss Carryforward 0.0 0.0 0.0 0.0 0.0
Other Gains (Losses) 0.0 0.0 0.0 0.0 0.0
Total Net Income 4,442.0 3,765.1 4,084.3 3,930.5 3,752.5
Dividends per share 0.42 0.40 0.36 0.33 0.30
Preferred Dividends 0.00 0.00 0.00 0.00 0.00
EPS from Total Operations 0.99 0.84 0.91 0.87 0.83
Diluted EPS from Total Operations 0.99 0.84 0.91 0.87 0.83
Income Tax Rate 33.8% 37.6% 35.0% 34.9% 35.0%
Shares Outstanding (thousands) 4,500 4,500 4,500 4,500 4,500
5
Exhibit 3. Ratios for Forecasting Capital City's Financial Statements 2005 – 08
Sales Growth
Cost of Sales to Sales
Selling & General Administration To Sales
Depreciation and Amortization to Net plant & Equip.
Cash to Sales
Accounts Receivable to Sales
Inventory to Sales
Other Current Assets to Sales
Net Plant and Equipment to Sales
Intangibles to Sales
Other Non-Current Assets to Sales
Other Current Liabilities to Sales
Accounts Payable to Sales
Short-Term Debt to Assets
Long-Term Debt to Assets
Other Non-Current Liabilities to Sales
Dividend Growth
Dividend Payout
Implied Tax Rate (based on avg. taxes 2001-2004)
EPS Growth
6
Exhibit 4. Capital Budgeting Details for New Manufacturing Process Investment Project
Initial Investment $8 Million
Depreciation MACRS 7 Year
Financing Method 100% Long-Term Debt
First Year Change in Revenue + $2.5 Million
Revenues in Future Years Change At + 10.0%
First Year Change in Expenses + $500,000
Expenses in Future Years Change At + 5.0%
Cannibalization of Existing Sales None
Project Discount Rate Current WACC
Reinvestment Rate for MIRR Current WACC
Tax Rate Implied tax rate from Exhibit 3
Working Capital $500,000
Project Life 10 Years
Salvage Value of Equipment in Year 10 $500,000
Beta 1.25
Expected Market Return 11.0%
Risk-Free Rate 4.0%
Cost of Short-Term Debt 7.5%
Cost of Long-Term Debt 9.0%
Cost of Internal Equity Calculated per CAPM
7
Exhibit 5. Financial Ratio and Valuation Metrics Template
2004 2003 2002 2001
Liquidity
Current
Quick
Net Working Capital to Total Assets
Asset Management
Days Sales Outstanding
Inventory Turnover
Fixed Assets Turnover
Total Assets Turnover
Debt Management
Long-Term Debt to Equity
Total Debt to Total Assets
Times Interest Earned
Profitability
Gross Profit Margin
Operating Profit Margin
Net After-Tax Profit Margin
Total Assets Turnover
Return on Assets
Equity Multiplier
Return on Equity
EPS (earnings per share)
DPS (dividends per share)
(NOPAT, EVA and FCF in thousands) Valuation Metrics Trend Analysis
2004 2003 2002 2001
NOPAT (net operating profit after tax)
ROIC (return on invested capital)
EVA (economic value added)
FCF (free cash flow)
Weighted Average Cost of Capital
(in thousands) 2004 2003 2002 2001 2000
Net Operating Working Capital
Operating Long Term Assets
Total Operating Capital
8
Exhibit 6. Financial Ratio and Valuation Metrics Template – Pro Forma Analysis
2005 2006 2007 2008
Liquidity
Current
Quick
Net Working Capital to Total Assets
Asset Management
Days Sales Outstanding
Inventory Turnover
Fixed Assets Turnover
Total Assets Turnover
Debt Management
Long-Term Debt to Equity
Total Debt to Total Assets
Times Interest Earned
Profitability
Gross Profit Margin
Operating Profit Margin
Net After-Tax Profit Margin
Total Assets Turnover
Return on Assets
Equity Multiplier
Return on Equity
EPS (earnings per share)
DPS (dividends per share)
(NOPAT, EVA, MVA and FCF in thousands) Valuation Metrics Trend Analysis
2005 2006 2007 2008
NOPAT (net operating profit after tax)
ROIC (return on invested capital)
EVA (economic value added)
FCF (free cash flow)
Weighted Average Cost of Capital
(in thousands) 2005 2006 2007 2008
Net Operating Working Capital
Operating Long Term Assets
Total Operating Capital
PV of Free Cash Flows
Long-term Growth Rate (user-supplied)
Horizon Value
Value of Operations
Value of Non-Operating Assets
Value of the Firm (Total)
Value of the Firm (Per Share)
MVA (market value added)
9
Exhibit 7. Modified Accelerated Cost Recovery Percentage Depreciation Allowances
Year 5-year 7-Year 10-Year
1 20.00% 14.29% 10.00%
2 32.00% 24.49% 18.00%
3 19.20% 17.49% 14.40%
4 11.52% 12.49% 11.52%
5 11.52% 8.93% 9.22%
6 5.76% 8.92% 7.37%
7 8.93% 6.55%
8 4.46% 6.55%
9 6.56%
10 6.55%
11 3.28%
10
Exhibit 8. Glossary of Financial and Valuation Metrics
Metric Calculation
Net Operating Working Capital Operating current assets – Operating current liabilities
Total Operating Capital NOWC + Operating long-term assets
Net Operating Profit After Taxes EBIT(1 – Tax rate)
Free Cash Flow NOPAT – Net investment in operating capital
Return on Invested Capital NOPAT/Total Operating Capital
Market Value Added Intrinsic value of firm − BV Debt − BV Equity
Economic Value Added NOPAT – WACC(Total Operating Capital)
Current Ratio Current assets/Current liabilities
Quick ratio (Current assets – Inventory)/Current liabilities
Net Working Capital Current assets – Current liabilities
Days Sales Outstanding Receivables/(Sales/365)
Inventory Turnover Sales/Inventory
Fixed Assets Turnover Sales/Net Property & Equipment
Total Assets Turnover Sales/Total assets
Total Debt to Total Assets (ST Debt + LT Debt)/Total assets
Times Interest Earned EBIT/Interest expense
Gross Profit Margin Gross Operating Profit/Sales
Operating Profit Margin EBIT/Sales
Net After-Tax Profit Margin Net Income/Sales
Return on Assets Net After-Tax Profit Margin(Total Assets Turnover)
Equity Multiplier Total Assets/Total Stockholders' Equity
Return on Equity ROA(Equity Multiplier)
Hamada model to estimate unlevered
beta based on levered beta bU = b/[1 + (1 – T)(D/S)]
Hamada model to estimate levered
beta based on unlevered beta b = bU[1 + (1 – T)(D/S)]
11
Exhibit 9: Excel Tips and Hints for Students
Valuation Functions
NPV Function: Excel's NPV function is actually a present value (rather than a net present value)
function because it discounts all selected cash flows to the period prior to the first cash flow.
Therefore it is necessary to add the initial cash outflow to the function to arrive at the net present
value. The function is structured as follows: =NPV(discount rate, cash flows). The first item in
the parentheses is the discount rate used to arrive at the present value (for the Capital City case,
use the WACC). The second item is the array of cash flows starting in period one. To include the
initial cash outflow (which should be a negative number), construct the formula as follows:
=NPV(discount rate, cash flows) + Initial Cash Outflow.
IRR Function: Inputs to the IRR function are the array of cash flows (note that this function
includes the time zero cash flow) as well as a guess at the internal rate of return. Any value
greater than zero and less than one will do for the guess – in the case we use the WACC. The
function should be entered as follows: =IRR(cash flows, IRR guess).
MIRR Function: Excel's MIRR function requires three inputs: the array of cash flows (this
function also includes the time zero cash flow), the discount rate used for calculating the present
value, and the reinvestment rate used for calculating the horizon value. In the case we use the
WACC for both of these rates. The function should be entered as follows: =MIRR(cash flows,
discount rate, reinvestment rate).
Conditional Functions
AND, IF and OR Functions: The IF function can be used to set a criterion for the formula
entered in the cell. The function is structured as follows: =IF(test criterion, value if true, value if
false). The value displayed in the cell will depend upon the results of the logical test applied.
Thus, if the statement reads: =IF(A1<=0,"Bad","Good"), then the statement will look in cell A1,
read the value entered there, and return the word "Bad" if the value is zero or less, or "Good" if
the value is greater than zero. If two criteria are needed, you can use a nested IF and AND
statement: =IF(AND(criterion 1, criterion 2), value if true, value if false). This statement only
applies the "value if true" if both criteria are met. For example, when calculating the Payback
Period and Discounted Payback Period, employ the following statement: =IF(AND(current year's
cumulative cash flow >= 0, prior year's cumulative cash flow < 0), number of prior year +
current year's cumulative cash flow ÷ current year's total cash flow,""). The two quotes at the end
of the statement instruct the function to leave the cell blank if either or both criteria are false.
Similarly, for calculating salvage value, we use nested IF and OR statements: =IF(OR(MACRS
= 5,MACRS = 7), after-tax salvage value, salvage value less final year of depreciation valued
after taxes). This calculates the after-tax salvage value for the 5-year and 7-year MACRS
depreciation schedules, while removing the final year of depreciation before subtracting taxes for
the 10-year MACRS schedule.
12
Conditional Formatting: In the Format pull-down menu there is a selection called Conditional
Formatting. This function can be used to highlight the value in a cell if it meets certain criteria.
For example, the cell font can be set to print in red if the value in a cell is negative. This can be
useful for highlighting negative NPV values in a project analysis, for example. Similarly, it can
be used to print the IRR and MIRR in red if they are less than the WACC, or print the Payback
Period and Discounted Payback Period in red if they are greater than the depreciable life of the
project.
Dynamic Labels
Excel allows numerical values to be displayed as text, and for the text versions of these values to
update as their reference cell updates. For example, consider the following entry: ="Discount
Rate = "&TEXT('Cost of Capital'!F13,"0.00%"). The formula first enters the text written
between the quotes, then adds a dynamic label for the numerical value in cell F13 from a
different spreadsheet tab labeled "Cost of Capital". In this case the numerical value is formatted
as a percentage with two decimal places (the purpose of the entry between the second set of
quote). The label updates every time the value in cell F13 updates.
Copying Worksheets
To create the second set of pro forma financial statements required by the case (the ones that
include the cash flows from the project), it is easier to copy the first set of pro forma worksheets
and update the copies to include the cash flows from the project. First, open the worksheet to be
copied. Use the Edit pull-down menu to select the Move or Copy Sheet function near the bottom
of the menu. The Move or Copy box will open, displaying a list of the worksheets in the
workbook. Select the preferred place in the workbook for the new pro forma worksheet to
appear, then click in the box marked Create a Copy (otherwise the existing sheet will be moved
rather than copied). Click on the OK button, and a copy of the worksheet will appear where
designated in the worksheet list, with the same links as the original sheet. The name of the sheet
will be the same as the original but with the addendum (2) at the end. Up to three worksheets can
be copied at any one time by holding down the control key while selecting the tabs of the sheets
to be copied.
Replacing Cell Values or References
After the second set of pro forma statements have been created, you can also create a copy of the
first pro forma financial analysis sheet. This sheet will still be linked to the original pro forma
worksheets, however, so it will be necessary to change the references in the cells from the first
pro forma worksheets to the second pro forma worksheets. Start by selecting the entire
worksheet (click the corner border cell, between the row and column indicators on the
worksheet), then pull down the Edit menu and select Replace. The Find and Replace box will
appear. Enter the name of the first pro forma income statement in the Find What box, and enter
the name of the second pro forma income statement in the Replace With box. Click the Replace
All button, and a pop-up box appears, indicating the number of replacements that were made in
the worksheet. Repeat these steps with the names of the first and second pro forma balance
13
sheets. This ensures that all of the data calculated in the second pro forma financial ratio analysis
worksheet are linked to the second set of pro forma financial statements.
Data Validation
Excel's Data validation function limits the values a specific cell can take. For example, it is well-
known that the growth rate in a dividend discount model must be less than the discount rate
when calculating the present value of a growing perpetuity of dividends. To ensure another user
of the spreadsheet does not enter a growth rate greater than the discount rate, you can "lock" the
cell against receiving erroneous entries. To accomplish this, pull down the Data menu and select
Validation. The Data Validation box opens, allowing for the selection of three criteria: the format
of the data (text vs. numeric, whole number or decimal, etc.), the comparison function (equal to,
less than, greater than or equal to, etc.), and the point of comparison (a number or the value in
another cell). Excel also provides the option of including a text box that will automatically
display when the cell is selected so you the nature of the restriction placed on the cell can be
explained. An error message box can also be included if an erroneous entry is made.
14
