Lesson 5 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 5 of 11 · 15 min
Working capital, capital investments and capital structure
Working capital comes from efficiency ratios applied to the revenue and cost forecasts; fixed assets from maintenance and growth capex less depreciation; and debt from a leverage ratio such as debt to EBITDA applied to forecast EBITDA.
In short
- Working capital: forecast DSO, DOH and DPO (efficiency ratios), then combine them with the revenue and COGS forecasts to get receivables, inventory and payables.
- Do not simply grow every working capital account at the sales growth rate: each item has its own driver.
- Maintenance capex sustains the existing business and is often based on D&A, adjusted slightly upward for inflation in capital goods; growth capex is discretionary and tied to expansion plans and revenue growth.
- Net PP&E rolls forward: beginning + capex − depreciation. Useful life ≈ gross fixed assets ÷ D&A.
- Capital structure: use leverage ratios (debt/capital, debt/equity, debt/EBITDA) as the forecast object, guided by history, financial strategy, guidance and the capex plan.
Unlock this lesson free for 7 days
Create a free account to get 7 days free: every lesson, video and flashcard, and the question bank. No card needed.