From the course: Financial Modeling Foundations

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Top-down financial models

Top-down financial models - Microsoft Excel Tutorial

From the course: Financial Modeling Foundations

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Top-down financial models

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- [Instructor] It's common to assume that our firm's financial results could best be illustrated with a CAGR, or compounded annual growth rate. The reason this is done in industry is not necessarily because it's correct, but because it's easy. An alternative approach is to use a top-down model for forecasting future financial results. Now, what we see is that this particular model has a 10% CAGR built-in and that CAGR changes based on the scenario in question. For negative scenarios, like a recession, we switch to a 15% CAGR and for very rosy scenarios, we switch to a 20% CAGR, or compounded annual growth rate. This a rough, blunt tool. It's unlikely that we know exactly what our compounded annual growth rate will be and it's unlikely that we'll have exact, the same compounded annual growth rate over time or that that compounded annual growth rate will change by the same amount every year. Say, rising or falling 1%. Instead, we might wanna use a little bit more sophisticated approach,…

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