From the course: Financial Modeling Foundations

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Applications of financial models

Applications of financial models - Microsoft Excel Tutorial

From the course: Financial Modeling Foundations

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Applications of financial models

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- [Instructor] Financial models have many business applications and knowing where to use them is just as important as knowing how to build them. The fundamental issue in any evaluation model is how to assess the risk of future cash flow projections. Think about an example with a stock that trades in the market. Let's pretend that stock ABC is trading at $60 per share. Well, we might say, based on financial theory, we want to own stock ABC. It helps us to diversify our portfolio overall and looks like a solid company. That's great but we still don't know whether we should actually buy the stock based on its current price of $60 per share. So we can turn to a mathematical model. Some sort of a computation to evaluate whether or not this stock is undervalued or overvalued, and maybe our mathematical model suggests that stock ABC is worth $30 per share. The problem is that the mathematical model is not taking into account what's actually going on in the markets themselves, the practical…

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