Lesson 6 of 11 · All lessons in this module
- Disaggregated models: why and how to build a forecast valuation model
- Forecasting revenue: top-down, bottom-up and non-recurring items
- Forecasting operating costs: COGS, SG&A and segment margins
- Expense models: regressions, itemized costs and margin assumptions
- Working capital, capital investments and capital structure
- Asset and financing models: investment, financing needs and FCFE
- Integrated cases: a regional revenue build and richer financing assumptions
- Scenario analysis: risk factors, cost structure and sensitivityVideo lesson
- Matching the model to the company: life cycle, distress and control
- From forecast statements to equity value: FCFF, terminal value and scenarios
- Integrated case: from assumptions to equity value, step by step
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 6 of 11 · 15 min
Asset and financing models: investment, financing needs and FCFE
The asset model sets how much the company must invest to support its revenue, and the financing model decides where the money comes from or goes to, which is what turns a forecast of profits into a forecast of FCFE.
In short
- Asset models can grow assets with revenue (constant turnover), use a regression of asset growth on revenue growth, or compare asset and revenue CAGRs; regressions are weaker than for costs because assets are bought before the revenue arrives.
- Grow a balance sheet line only if it is operating and involves cash; do not grow non-operating assets (marketable securities) or market-value changes (a goodwill impairment).
- Financing needs = Δoperating assets − Δnon-debt liabilities − Δretained earnings. Positive: raise cash, debt or equity. Negative: a surplus to hold as cash, repay debt or return to shareholders.
- FCFE = NI − (Δgross LT assets − Dep) − ΔWC + Δdebt Δcash + dividends + repurchases − issuance.
- Dividends raise financing needs; planned borrowing lowers them and raises FCFE. FCFF depends on profit and investment, so it is much less sensitive to the financing choice.
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