From the course: Financial Modeling Foundations

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Stress testing models

Stress testing models - Microsoft Excel Tutorial

From the course: Financial Modeling Foundations

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Stress testing models

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- [Instructor] Using financial models in business requires being able to show what will happen when unexpected events arise. And that's exactly what stress testing is all about. Now we have here an LBO model related to the buyout of a firm. We've made a variety of different assumptions. For example, we're assuming that the offer premium we'll have to provide is 20%. That is, if the share price is $140 per share we will pay a 20% premium and offer $168 per share. We're gonna use 50% debt and 50% equity. We can change these number of course any time we'd like, and a good financial model should update. At the end of the day what we really care about is how profitable this particular investment will be. We can measure that in a variety of ways. Net present value and IROR, or internal rate of return, are two of the most common. IROR is arguably more popular within finance, particularly within corporate finance, largely because it provides essentially a rate of return, a percentage interest…

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