MBAD/F 619: Risk Analysis
and Financial Modeling
Instructor: Linda Leon
Summer 2010
http://myweb.lmu.edu/lleon/mbaf619/
Overview of Financial Modeling

Addresses problems and decisions related to
a firm’s assets and liabilities



Investment decisions identify which assets should
be purchased
Financing decisions determine the sources of funds
necessary to purchase the assets
Sets the objectives for future investment and
financing decisions, judges the effects of
various decisions and guides the decisions
about which investment or financing
alternatives should be undertaken
Financial Modeling: An Overview of
Relationships Between Inputs and Outputs
Special
Analysis
Fund Flow
Analysis
Pro forma
Statements
Ratio
Analysis
Investment
Data
Financial Model
(computer program)
Financial
Data
Operating History and Future
Assumptions
Staff
Inputs
Manufacturing or
Service Inputs
Sales
Inputs
Two General Approaches to
Financial Modeling

Simulation


Process of imitating the firm so that the
possible consequences of alternative
decisions and strategies can be analyzed
prior to implementation (MBAD/F 619)
Optimization

Identifies which decision alternative leads to
a desired objective given a specified set of
fixed assumptions (MBAD/F 617)
Overview of Risk

What is your definition of risk?

Types of financial risk
Capital risk
 Liquidity risk
 Systematic risk
 Systemic risk

Risk Management Applications

Investment Decisions





Capital Budgeting
Mergers & Acquisitions
Real Estate
Portfolio Strategies
Financing Decisions




Cash budgeting
Working Capital Management
Debt Financing
Options
Financial Modeling

Many financial models which use advanced
modeling and analytical techniques are
spreadsheet based

There is a market demand for more
sophisticated models and analysis by financial
end-users

Most end-users prefer to develop their own
models (cost,flexibility)
Advantages of End-User Modeling

End-users get closer to the raw data and the
assumptions being made

End-users can customize the models to
generate information that fits their needs

End-users can see results easily and
immediately, which enhances strategy
generation and encourages risk analysis
Disadvantages of End-User Modeling

Incorrect information is generated by inappropriate or
inaccurate models (20 to 40% contain significant
errors)

End-users are overconfident about the quality of their
own spreadsheets

Poorly designed models can discourage strategy
generation and risk analysis

End-users may not always employ the most productive
methods for generating insights or may misinterpret
the generated information
Recent spreadsheet research
shows…

End users typically do not plan their
spreadsheets

End users rarely spend time debugging their
models

End users almost never let another person
review their spreadsheets

Many end users do not consistently use tools
that can make modeling productive and
insightful