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by Simon Benninga  

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other material on financial modeling

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Two sample PFE
chapters are downloadable

Note:  The Excel notebooks which accompany PFE include a macro-defined function called getformula( ) which keeps track of cell references. When you open the notebook, Excel will notify you that there’s a macro and ask if you want to enable it.  If you want to see the cell references as in the text, click on Enable Macros .


If you are a professor/instructor and wish to use parts of PFE in your course, contact me for special download/use permission.

I am building a site for instructors who use Principles of Finance with Excel in a course:

·         Powerpoints for selected chapters

·         Additional problems

·         Exam questions

This material is still under development.  Write me for access (click here).

If you are an instructor using PFE, and want to post materials you have developed:  I will give full credit to all contributors.



New!  Excel/Finance Forum

Send questions or comments about using Excel in finance applications. 

Answers and comments will be posted.



Preface:  How to read these materials; what's assumed, etc.  
Also includes a roadmap to the book

Sections of the book:

·         Section 1:  Introductory chapters

·         Section 2:  Capital Budgeting

·         Section 3:  Portfolio models

·         Section 4:  Valuing stocks and bonds

·         Section 5:  Capital structure and dividend policy

·         Section 6:  Options and derivatives

·         Section 7:  Excel topics


Section 1:  Introduction
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Overview to introduction



Chapter 1:  Introduction to Principles of Finance with Excel


What is finance? Stress on simple examples of both personal and corporate finance as problems solved in the book.  Discussion of importance of Excel.

Chapter 1 examples

Chapter 2:  Business organization and taxes


This chapter discusses 4 forms of business organization and income taxation.  Excel is a great way to compute income taxes.  We also discuss the "double taxation" of corporate income.

Chapter 2 examples

Chapter 2 exercises

Chapter 3:  Basic accounting concepts


Capital budgeting and accounting are closely related, but intro students often have very weak accounting backgrounds.  This chapter aims to bridge the gap by refreshing basic accounting concepts.

Chapter 3 examples

Chapter 3 exercises

Chapter 3 case:  Valuing Anytown Travel Services

This case is a valuation case based on the story in Chapter 3.  Read note in next column.

Chapter 3 Mini-Case

Case solution available on request

Some instructors will want to teach Chapter 3 after they have taught the basic capital budgeting Chapters 5-9.  These instructors might want to use the data in Chapter 3 to value Anytown Travel Services.  This is case is not suitable to accompany Chapter 3 if taught before the capital budgeting chapters of the book.

Chapter03Mini-Case template

This template sets up all the calculations.

Chapter 4:  Cash management



Chapter 4 examples

Chapter 4 exercises


Section 2:  Capital Budgeting
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Overview to capital budgeting chapters

Description, with some information on Excel background


Chapter 5:  Introduction to time-value of money


Time-value of money:  Future value, present value, IRR, ... .  Excel functions PV, IRR, NPV, PMT, FV.

Chapter 5 examples

Chapter 5 exercises 

Chapter 6: What does it cost?



Applications of time-value of money.  Effective annual interest rate, APR, application to credit cards, mortgages, simple lease analysis, car leases.  Also multiple compounding periods and continuous compounding.

Chapter 6 examples

Chapter 6 exercises 

Chapter 6 cases

Chapter 6 mini-cases
Current version:  18mar03


Analyzing student loans



Three examples of APR from Web. You're asked to compute the EAIR for each case. 

U.S. student loans have:  subsidized interest rate, grace periods before repayment, and long repayment periods. 




Student loan Excel notebook

Chapter 7:  Basics of capital budgeting



Real estate mini-case  

Comparing NPV and IRR, ranking projects, sunk costs, foregone opportunities, salvage values, the effect of taxes, introduction to cash flows

The case discusses equity cash flows for a real estate investment.  Also Excel functions PPMT and IPMT.

Chapter 7 examples

Chapter 7 exercises


Template for mini-case

Mini-case answers

Chapter 8:  More issues in capital budgeting


Mini-case:  Zero percent auto loans

Problems with IRR, projects with different lifetimes, mid-year discounting, more on taxes, inflation, leasing with taxes

Chapter 8 examples

Chapter 8 exercises

Zero percent auto loan case solution:  spreadsheet, text

Chapter 9:  Deriving the WACC




Weighted-average cost of capital from start to finish.  Uses the Gordon dividend model to derive cost of equity.  Uses the concept of funding cost as a possible candidate for the discount rate.

Chapter 9 examples

Chapter 9 exercises

Chapter 9 caseWachovia Bank mini-case

Computing the cost of equity for Wachovia using Gordon model.

Wachovia bank case data

Chapter 10:  DCF valuation with financial planning models


Building a pro forma model in Excel.  Doing a discounted cash flow (DCF) valuation using a pro forma model.

Chapter 10 examples

Chapter 10 exercises

Chapter 10 template

Chapter 10 Case:  Intel and AMD, building a financial model


Analyze the financial statements of Intel and AMD and use the information to build a financial model. 

Intel-AMD, financial data for case

Chapter 10 case:  Valuing PPG


This case (it's long--almost 50 pages) analyses PPG's financial statements and values the company

Valuing PPG

PPG case, appendix


Section 3:  Portfolio Analysis and CAPM
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Overview to portfolio chapters




Chapter 11:  What is risk?


An introduction to the concept of financial risk.  

Chapter 11 examples

Chapter 11 exercises

Chapter 12:  Portfolio statistics:  introduction


Mean, variance, covariance, regression--all with appropriate Excel functions and real-world examples

Chapter 12 examples

Chapter 12 exercises

Chapter 13:  Portfolio returns and the efficient frontier

Why diversify?  The efficient frontier.  The end of the chapter deals with a 3-asset problem.

Chapter 13 examples

Chapter 13 exercises 

Chapter 14:  The CAPM and SML

The capital market line (CML) and the security market line (SML). The concept of beta.

Chapter 14 examples

Chapter 14 exercises

Chapter 15:  Using the SML to measure performance

Calculating beta, diversifiable versus idiosyncratic risk, investment performance evaluation.

Chapter 15 examples

Chapter 15 exercises

Jack and Jill

Chapter 16:  Using the SML for Cost of Capital Calculations


Computing the cost of equity, cost of debt, WACC, asset beta, other related issues

Chapter 16 examples

Chapter 16 exercises

Mini-Case--Computing the WACC for Kellogg

Gives all the information to do a WACC calculation for Kellogg (using the SML). 



Section 4:  Valuing Securities
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Overview to security valuation



Chapter 17:  Market efficiency

Keeping your mind straight about valuation:  What markets do and don't tell us.

Chapter 17 examples  

Chapter 17 exercises

Chapter 18:  Bond valuation

Mini-case:  TWA bonds

Some explanations about bonds.  Treasuries--T-bills and bonds.  Calculating YTM (annualizing the YTM) and valuing bonds.  Excel functions:  XIRR and Yield.  

Chapter 18 examples

Chapter 18 exercises

TWA case

Chapter 19:  Share valuation 



Chapter 19 Appendix:  Valuing Procter & Gamble


Four methods of share valuation:  Efficient markets, FCF discounting, direct equity cash flow valuation, and multiples.


Applying FCF valuation to Procter & Gamble.  Uses asset beta and the new concept of a two-stage Gordon cost-of-equity model.

Chapter 19 examples

Chapter 19 exercises



Procter & Gamble appendix


Section 5:  Capital Structure and Dividend Policy
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Overview to capital structure chapters



Chapter 20:  Capital structure and value of the firm--theory


Modigliani-Miller and Miller models with taxes (corporate and personal).

Chapter 20 files

Chapter 20 exercises

Chapter 21:  Capital structure and value of the firm--practical implications


Calculating asset betas.  Some examples which show that leverage does not affect the WACC

Chapter 21 files

Chapter 21 exercises

Chapter 22:  Dividend policy


Do dividends affect corporate value?

Chapter 22 files

Chapter 22 exercises


Section 6:  Options
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Overview to option chapters



Chapter 23:  Introduction to options


Definitions, profit graphs, etc.

Chapter 23 examples

Chapter 23 exercises

Chapter 24:  Properties of option prices


Arbitrage properties of option prices

Chapter 24 examples

Chapter 24 exercises

Chapter 25:  Valuing options:  The Black-Scholes formula 



The most famous option pricing model explained.  Discussion of Black-Scholes, volatility (implied and historical).   A short discussion of real options.

Chapter 25 examples

Chapter 25 exercises

Chapter 26:  Valuing options:  The binomial model

Basic binomial model.  Valuing American options with early exercise

Chapter 26 examples

Chapter 26 exercises


Section 7:  Technical Chapters
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Overview to Excel chapters



Chapter 27:  Using Excel--starting off


Some suggestions about using Excel:  Copying (relative & absolute), printing, formulas.  Assumes a tiny bit of pre-knowledge (but not more).

Chapter 27 examples

Chapter 27 exercises


Chapter 28:  Graphing in Excel


More on graphs than is contained in Chapter 27.

Chapter 28 examples

Chapter 28 exercises

Chapter 29:  Common Excel functions



 Most of the functions used in the book.  Some functions are contained in the other relevant chapters of Section 7:  for example, the date functions in Chapter 31, data functions in Chapter 33.

Chapter 29 examples

Chapter 29 exercises

Chapter 30:  Data tables


The best way to do sensitivity analysis in Excel

Chapter 30 examples

Chapter 30 exercises

Chapter 31:  Dates in Excel



This chapter shows you how to exploit Excel's facility with dates.  Includes a discussion of the XNPV and XIRR functions.

Chapter 31 examples

Chapter 31 exercises

Chapter 32:  Goal seek and Solver


Two Excel features used throughout the book.   Goal Seek usually works fine, but Solver is often better.

Chapter 32 examples

Chapter 32 exercises

Chapter 33:  Data manipulation


Sorts; filters; the functions Dsum, Daverage, etc.; importing text files; conditional formatting

Chapter 33 examples

Chapter 33 exercises

Dell.txt (part of exercises)

Chapter 34:  Word and Excel


How to transfer numbers and charts from Excel to Word and make things look nice

Chapter 34 examples

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