Financial Modeling, fifth edition

A substantially updated new edition of the essential text on financial modeling, with revised material, new data, and implementations shown in Excel, R, and Python.

Financial Modeling has become the gold-standard text in its field, an essential guide for students, researchers, and practitioners that provides the computational tools needed for modeling finance fundamentals. This fifth edition has been substantially updated but maintains the straightforward, hands-on approach, with an optimal mix of explanation and implementation, that made the previous editions so popular. Using detailed Excel spreadsheets, it explains basic and advanced models in the areas of corporate finance, portfolio management, options, and bonds. This new edition offers revised material on valuation, second-order and third-order Greeks for options, value at risk (VaR), Monte Carlo methods, and implementation in R. The examples and implementation use up-to-date and relevant data.
 
Parts I to V cover corporate finance topics, bond and yield curve models, portfolio theory, options and derivatives, and Monte Carlo methods and their implementation in finance. Parts VI and VII treat technical topics, with part VI covering Excel and R issues and part VII (now on the book’s auxiliary website) covering Excel’s programming language, Visual Basic for Applications (VBA), and Python implementations. Knowledge of technical chapters on VBA and R is not necessary for understanding the material in the first five parts. The book is suitable for use in advanced finance classes that emphasize the need to combine modeling skills with a deeper knowledge of the underlying financial models.

The late Simon Benninga was Professor of Finance and Director of the Sofaer International MBA program at the Faculty of Management at Tel-Aviv University. For many years he was a Visiting Professor at the Wharton School of the University of Pennsylvania. Tal Mofkadi is an Assistant Professor in the School of Finance in the Faculty of Management at Tel Aviv University, University of Amsterdam, and Nagoya University of Business and Commerce, and the managing partner of Numerics, an economic and financial consultancy firm.

Preface and Acknowledgments xix
Before All Else 1
I Corporate Finance 13
1 Basic Financial Analysis 15
2 Corporate Valuation Overview 53
3 Calculating the Weighted Average Cost of Capital (WACC) 73
4 Pro Forma Analysis and Valuation Based on the Discounted Cash Flow Approach 111
5 Building a Pro Forma Model: The Case of Merck 145
6 Financial Analysis of Leasing 161
II Bonds 177
7 Bond's Duration 179
8 Modeling the Term Structure 207
9 Calculating Default-Adjusted Expected Bond Returns 231
III Portfolio Theory 253
10 Portfolio Models--Introduction 255
11 Efficient Portfolios and the Efficient Frontier 287
12 Calculating the Variance-Covariance Matrix 337
13 Estimating Betas and the Security Market Line 357
14 Event Studies 377
15 The Black-Litterman Approach to Portfolio Optimization 405
IV Options 435
16 Introduction to Options 437
17 The Binomial Option Pricing Model 459
18 The Black-Scholes Model 499
19 Option Greeks 537
20 Real Options 569
V Monte Carlo Methods 591
21 Generating and Using Random Numbers 593
22 An Introduction to Monte Carlo Methods 639
23 Simulating Stock Prices 661
24 Monte Carlo Simulations for Investments 689
25 Value at Risk (VaR) 715
26 Replicating Options and Option Strategies 733
27 Using Monte Carlo Methods for Option Pricing 765
VI Technical 829
28 Data Tables 831
29 Matrices 849
30 Excel Functions 859
31 Array Functions 905
32 Some Excel Hints 919
33 Essentials of R Programming 951
Selected References 963
Index 975