Corporate and Project Finance Modeling

Chapter 12Putting Together Financial Statements and Calculating Income Taxes

Once the module that computes revenues, expenses, and working capital is established along with the depreciation schedule to derive after-tax cash flow and the debt schedule to calculate interest expense, the profit and loss statement, the cash flow statement and the balance sheet can be put together. In a corporate model, the profit and loss statement produces essential results for valuation analysis, as the net income defines the earnings per share and the return on equity. For a project finance model, earnings are not so important in presentation of the results, but calculation of the profit and loss statement is required to develop the line item for taxes paid that is used in the cash flow waterfall.

An effective way to structure the profit and loss statement is to compute earnings before interest, taxes, depreciation, and amortization (EBITDA) after revenues are subtracted from cash operating expenses and then subtract various letters like DA to end up with E (earnings). The EBITDA can be computed from the revenues and cash operating expenses that were developed in the pretax analysis. Depreciation and amortization (DA) can then be subtracted to derive EBIT. If you have set up your model with different modules, this is easy because the depreciation expense is already defined as a component of computing free cash flow. After computing EBIT, interest expense is subtracted and interest income is added, ...