• 051 08/04/2016

    Context: I recently received a message from a subscriber asking if I could explain the CAGR formula. He said that he had used it in one of his models, and when he looked it up online there was no explanation for the math. His response: “Welp, if you say so formula…” So I thought I would take a moment to explain the formula.

    Q: Do you have an explanation for the CAGR formula?


    CAGR Formula


    A: First, for the unfamiliar, let’s define the Compound Annual Growth Rate (CAGR). CAGR is a simple metric that measures the average rate of growth of a sum, be that a figure like sales or an investment, over any number of periods. It’s easy to picture visually:

     

    CAGR Growth Comparison

     

    In Example 1 above, a $1.00 investment grows by 20% for three years to a value of $1.73. The CAGR is 20%. Now, as you can see in Example 2, even if the growth each year is uneven, because the CAGR formula uses only the ending and beginning values to calculate average growth, the result will be the same. 

    With the definition out of the way we can move on to understanding the formula, and for that purpose I have developed the visual that follows:

     

    CAGR Formula Explained

    Click here to download the Excel file


 



  • 050 07/28/2016

    We are in the process of developing the next collection of videos and models for the Leveraged Buyout Model series. This new collection will cover the following topics:

    1. Transitioning from one worksheet to multiple worksheets.

    2. Adding preferred stock to the capital structure.

    3. Adding a cash flow sweep that will pay down all tranches of debt and preferred stock.

    The videos and financial models for items one and two are already up; only the notes for these two topics are pending. I have been receiving a lot of requests the third model listed, but do not yet have the video prepared. As an interim solution I thought I would post the Excel file here while I work on the video.

    CLICK HERE TO DOWNLOAD THE LBO MODEL (w/ CASH SWEEP)

    To help guide you through the process of adding a cash flow sweep, rows altered for this update are indicated in Column A of every worksheet with pale purple shading (see image below).

    LBO Cash Sweep


    The purpose of this installment is to transition from a model that uses excess cash to pay down the revolver, to a model that will use excess cash to pay down all debt liabilities and preferred stock. It does not, however, permit specifying the percentage of excess cash flow that should be used to make optional repayments. If you want to maintain a certain amount of cash you can do that in this model by specifying the minimum cash balance.

    As always, all models on this website are intended for educational purposes only.

 



  • 049 07/18/2016 Texas A&M University-Commerce Feedback

    In early 2016 a professor of finance at Texas A&M University-Commerce used ASimpleModel.com to introduce 120 graduate students to financial modeling. At the conclusion of the class he required each student to write a review of the website. Positive or negative, it did not matter, students were free to respond openly.

    The professor let me know he intended to do this and offered to share the results. After a few weeks I received a 41 page document containing all of the student’s responses (with names removed per university policy). I was delighted to see that it was overwhelmingly positive.

    What follows are excerpts from the reviews received. Each quote, separated by ellipses, comes from a different student:

    [ASimpleModel] gave me a new perspective on financial models.  Now, I don't cringe when I hear "finances" because I have a better understanding.  It is no longer intimidating! 

    I loved the fact that I could take the quiz multiple times until I got a perfect score.  I thought that having the option of taking the quiz without worrying about my grade (because I know that I can take it again) was extremely beneficial for me.  For, it took the pressure off; which gave me the ability to freely grasp the material without worrying about getting the wrong answer, and affecting my grade.  I think that if you really want to grasp the material, taking the quiz with this type of format is beneficial and a fun way to learn.

    The course content was organized, provided a large volume of information in a short period of time, and the instruction was easy to understand. The instruction followed a progression through each section of the financial statement until the model was completely constructed. Having had several Accounting courses, initially it seemed odd viewing an entire model in one Excel spreadsheet. It seemed like too much information in one place or on one page and it made me a little uncomfortable, but by the end of the 2nd section I found this to be the most efficient manner that I’ve ever been taught Accounting.

    Previously, I was taught, possibly based on how courses are structured, to complete and present each worksheet for a financial document separately. This is probably due to learning each section separately in a course, the need to submit sections independently for grading, then having to build on the last area learned in order to move into the next area you’re about learn. This is good but I believe a financial model would be a better way of learning. It might present a bit of overload for some students but probably not the majority. I wish I’d been exposed to this method 2 years ago.

    I found this website extremely easy to use and would definitely recommend using it again. … I liked the way the material from the videos was directly related to the questions that were in the following quiz. I also liked how you could see what you got right on the quiz and what you got wrong, which allowed me to focus more on what I was missing and correct myself and learn the correct answer for that particular question. Another thing I liked was that the videos were of reasonable length, which helps the person watching stay focused [in contrast to] a very long video that is drawn out but doesn't cover any more information. Overall, I thought using this website for an assignment was very effective and would recommend using it again.

    The gentleman narrating throughout the video seemed to know a lot about the subject.  I like how he simplified the cash flow part of the model.  I really enjoyed this activity. 

    What a great way to end the semester.  While other courses seem to be piling on the last minute work, group projects, etc, this was a nice distraction from that.  I liked the format of the site.  It was very easy to navigate through the sections and the fact that you could take the quiz more than once took the pressure off having to nail it the first time.  The "one and done" concept that most sites offer, promotes procrastination as the student rarely feels ready to take the quiz.  Instead, I was able to take the quiz, see how I did, then go back to the videos to learn what I missed.  This made for an enjoyable learning experience. 

    The ASimpleModel project / quiz was probably one of my most favorite parts of the class. It connected the dots, and the instructor made it relatable and engaging. I've taken several accounting courses, and this put it in a high-level, simple perspective. I wish I knew of this site during my accounting courses.

    The videos were funny and engaging, which made it easy to sit through the full length. The content of the quizzes was directly from the video, so as long as you watch the video, the quizzes should be no problem.

    This was an incredible opportunity for ASimpleModel.com. It was our first pilot program with a university, and the interaction with the professor and the teaching assistant was invaluable. This summer, based on their feedback, we have been working to streamline the process of uploading students to the platform and add new functionality. 

    We intend to continue providing this service free of charge for professors interested in using it as a classroom aid. If you are affiliated with a university and would like to learn more about this process please reach out through the contact page. 

 




 



Models are:
 
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above

 

 


*Answers a, b, c, d, e, f and g are all correct.