What is this model for?
Before you begin any financial model build, make sure you know the purpose of the model.
The most important question about any financial model build is this:
What is the purpose of this financial model?
If we don't know this at the outset, we will waste a lot of time along the way. We must start with the end in mind.
Models can have many different purposes. These range from valuing an asset, to determining debt capacity, from pricing a bid to understanding future operating cash requirements for a business.
For our case study model, the critical text to help us answer this question is the following:
You are being asked for your offer to purchase 40% of the common stock of the Project Company (ProjectCo). Your offer will include a premium above the book value of the equity that you are willing to pay to acquire this share in the Project.
From this, we can see that the purpose of the model we will build is to value a 40% share in the Project.
Everything we do in the model should contribute towards this goal. The ability to answer this question with confidence is also the marker of how we will know when we have completed the Project.
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