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Table of Contents
Cover
Title Page
Copyright
Dedication
About This Book
The Author
Part One: Introduction to Modeling
1 Modeling and Its Uses
1.1 WHAT IS A MODEL?
1.2 WHAT ARE MODELS USED FOR?
2 Principles of Model Design
2.1 INTRODUCTION
2.2 DECISION IDENTIFICATION, FRAMING, AND STRUCTURE
2.3 DECISION CRITERIA AND INFORMATION NEEDS
2.4 SENSITIVITY‐BASED DESIGN
2.5 DATA AND DATA SOURCES
2.6 MODEL MAPPING AND APPROXIMATIONS
2.7 BUILDING AND TESTING
2.8 RESULTS PRESENTATION
2.9 BIASES
Part Two: Essentials of Excel
3 Menus, Operations, Functions, and Features
3.1 INTRODUCTION
3.2 STRUCTURE AND MENUS
3.3 CALCULATIONS USING ARITHMETIC
3.4 FUNCTION BASICS
3.5 A CORE FUNCTION SET
3.6 FURTHER PROPERTIES AND USES OF FUNCTIONS
3.7 CALCULATION SETTINGS AND OPTIONS
3.8 KEYTIPS AND SHORTCUTS
3.9 ABSOLUTE AND RELATIVE REFERENCING
3.10 AUDITING AND LOGIC TRACING
3.11 NAMED RANGES
3.12 BEST PRACTICES: OVERVIEW
3.13 BEST PRACTICES: FLOW
3.14 BEST PRACTICES: TIME AXIS
3.15 BEST PRACTICES: MULTIPLE WORKSHEETS
3.16 BEST PRACTICES: FORMATTING
3.17 MODEL TESTING, CHECKING, AND ERROR MANAGEMENT
3.18 GRAPHS AND CHARTS
4 Sensitivity and Scenario Analysis
4.1 INTRODUCTION
4.2 BASIC OR MANUAL SENSITIVITY ANALYSIS
4.3 AUTOMATING SENSITIVITY ANALYSIS: AN INTRODUCTION
4.4 USING DataTables
 4.5 CHECKING THE RESULTS, LIMITATIONS, AND TIPS
4.6 CREATING FLEXIBILITY IN THE OUTPUTS THAT ARE ANALYZED
4.7 SCENARIO ANALYSIS
4.8 VARIATIONS ANALYSIS
4.9 USING GoalSeek
4.10 FURTHER TOPICS: OPTIMIZATION, RISK, UNCERTAINTY, AND SIMULATION
Part Three: General Calculations and Structures
5 Growth Calculations for Forecasting
5.1 INTRODUCTION
5.2 GROWTH MEASUREMENT AND FORECASTING
5.3 LOGIC REVERSALS
5.4 FORECASTING STRUCTURES IN PRACTICE
5.5 SIMPLIFYING THE SENSITIVITY ANALYSIS AND REDUCING THE NUMBER OF
PARAMETERS
5.6 DEALING WITH INFLATION
5.7 CONVERSIONS FOR MODEL PERIODS
5.8 FURTHER TOPICS: LOGARITHMIC AND EXPONENTIAL GROWTH
6 Modular Structures and Summary Reports
6.1 INTRODUCTION
6.2 MOTIVATION FOR SUMMARY AREAS AND THEIR PLACEMENT
6.3 EXAMPLE I: SUMMARIES AND CONDITIONAL SUMMARIES
6.4 EXAMPLE II: TARGETS, FLAGS, AND MATCHING
6.5 SENSITIVITY ANALYSIS
6.6 COMMENTS ON FORMATTING
6.7 INITIALIZATION AREAS
7 Scaling and Ratio‐driven Forecasts
7.1 INTRODUCTION
7.2 BASIC USES
7.3 LINKS TO LENGTH OF MODEL PERIODS
7.4 DAYS' EQUIVALENT APPROACHES
7.5 EXAMPLE I: FORECASTING FROM REVENUES TO EBITDA
7.6 USING RATIO‐BASED FORECASTING EFFECTIVELY
7.7 EXAMPLE II: RATIO‐BASED FORECASTING OF CAPITAL ITEMS
7.8 FURTHER TOPICS: LINKS TO GENERAL RATIO ANALYSIS
8 Corkscrews and Reverse Corkscrews
8.1 INTRODUCTION
8.2 CLASSICAL CORKSCREWS
8.3 BENEFITS AND FURTHER USES
8.4 REVERSE CORKSCREWS
9 Waterfall Allocations
9.1 INTRODUCTION
9.2 EXAMPLE I: COST SHARING
9.3 EXAMPLE II: TAX CALCULATIONS
9.4 OPTIONS FOR LAYOUT AND STRUCTURE
9.5 FURTHER TOPICS: WATERFALLS FOR SHARING CAPITAL RETURNS OR CARRIED
INTEREST
10 Interpolations and Allocations
 10.1 INTRODUCTION
10.2 EXAMPLE I: LINEAR SMOOTHING
10.3 EXAMPLE II: PROPORTIONAL SMOOTHING
10.4 USES OF TAPERING AND INTERPOLATION
10.5 TRIANGLES
10.6 FURTHER TOPICS: TRIANGLES
Part Four: Economic Foundations and Evaluation
11 Breakeven and Payback Analysis
11.1 INTRODUCTION
11.2 SINGLE‐PERIOD BREAKEVEN ANALYSIS: PRICES AND VOLUMES
11.3 BREAKEVEN TIME AND PAYBACK PERIODS
12 Interest Rates and Compounding
12.1 INTRODUCTION
12.2 STATED RATES AND CALCULATIONS WITHOUT COMPOUNDING
12.3 COMPOUNDING TYPES AND EFFECTIVE RATES
12.4 CONVERSION OF EFFECTIVE RATES FOR PERIODS OF DIFFERENT LENGTHS
12.5 AVERAGE EFFECTIVE RATES
12.6 IMPLIED RATES AND BOOTSTRAPPING
13 Loan Repayment Calculations
13.1 INTRODUCTION
13.2 EFFECTIVE RATES FOR INTEREST‐ONLY REPAYMENTS
13.3 ALIGNING MODEL PERIODS WITH INTEREST REPAYMENTS
13.4 CONSTANT REPAYMENT LOANS USING THE PMT FUNCTION
13.5 CONSTANT REPAYMENT LOANS: OTHER FUNCTIONS
13.6 PERIODS OF DIFFERENT LENGTHS
14 Discounting, Present Values, and Annuities
14.1 INTRODUCTION
14.2 THE TIME VALUE OF MONEY
14.3 CALCULATION OPTIONS FOR PRESENT VALUES
14.4 ANNUITIES AND PERPETUITIES
14.5 MULTI‐PERIOD APPROACHES AND TERMINAL VALUES
14.6 FURTHER TOPICS I: MATHEMATICS OF ANNUITIES
14.7 FURTHER TOPICS II: CASH FLOW TIMING
15 Returns and Internal Rate of Return
15.1 INTRODUCTION
15.2 SINGLE INVESTMENTS AND PAYBACKS
15.3 MULTIPLE PAYBACKS: AVERAGE RETURNS AND THE INTERNAL RATE OF
RETURN
15.4 USING ECONOMIC METRICS TO GUIDE INVESTMENT DECISIONS
15.5 PROPERTIES AND COMPARISON OF NPV AND IRR
Part V: Corporate Finance and Valuation
16 The Cost of Capital
16.1 INTRODUCTION
16.2 RETURNS, COSTS, AND OPPORTUNITY COSTS OF CAPITAL
16.3 THE ROLE OF RISK IN DETERMINING THE COST OF CAPITAL
16.4 THE PROPERTIES AND BENEFITS OF DEBT
16.5 THE FINANCING MIX AND THE WEIGHTED AVERAGE COST OF CAPITAL
 16.6 MODIGLIANI‐MILLER AND LEVERAGE ADJUSTMENTS
16.7 THE CAPITAL ASSET PRICING MODEL
16.8 FURTHER TOPICS: DERIVATION OF LEVERAGING AND DELEVERAGING
FORMULAS
17 Financial Statement Modeling
17.1 INTRODUCTION
17.2 FINANCIAL STATEMENT ESSENTIALS
17.3 KEY CHALLENGES IN BUILDING INTEGRATED FINANCIAL STATEMENT MODELS
17.4 FORECASTING OF THE INTEGRATED STATEMENTS: A SIMPLE EXAMPLE
17.5 THE DYNAMIC FINANCING ADJUSTMENT MECHANISM
17.6 GENERALIZING THE MODEL FEATURES AND CAPABILITIES
17.7 STEPS AND PRINCIPLES IN BUILDING A FINANCIAL STATEMENT MODEL
17.8 FURTHER TOPICS: AVOIDING CIRCULARITIES
18 Corporate Valuation Modeling
18.1 INTRODUCTION
18.2 OVERVIEW OF VALUATION METHODS
18.3 PRINCIPLES OF CASH FLOW VALUATION
18.4 FREE CASH FLOW FOR ENTERPRISE VALUATION
18.5 THE ROLE OF THE EXPLICIT FORECAST
18.6 EXAMPLE: EXPLICIT FORECAST WITH TERMINAL VALUE CALCULATION
18.7 FURTHER TOPICS I: ENTERPRISE VALUE BASED ON FREE CASH FLOW AND
EQUIVALENCES
18.8 FURTHER TOPICS II: VALUE‐DRIVER FORMULAS
18.9 FURTHER TOPICS III: IMPLIED COST OF EQUITY
19 Ratio Analysis
19.1 INTRODUCTION
19.2 USE AND PRINCIPLES
19.3 RATIOS FOR PROFITABILITY AND VALUATION
19.4 RATIOS RELATING TO OPERATIONS AND EFFICIENCY
19.5 RATIOS FOR LIQUIDITY AND LEVERAGE
19.6 DuPont ANALYSIS
19.7 VARIATIONS ANALYSIS WITHIN THE DuPont FRAMEWORK
19.8 FURTHER TOPICS: PORTFOLIOS AND THE PIOTROSKI F‐SCORE
Part Six: Data and Statistical Analysis
20 Statistical Analysis and Measures
20.1 INTRODUCTION
20.2 DATA STRUCTURES IN EXCEL AND THE IMPACT ON FUNCTIONALITY
20.3 AVERAGES AND SPREAD
20.4 THE AGGREGATE FUNCTION
20.5 CONDITIONAL AGGREGATIONS
20.6 DATABASE FUNCTIONS
20.7 CORRELATIONS, COVARIANCE, AND REGRESSION
20.8 EXCEL TABLES
20.9 PIVOT TABLES
20.10 FURTHER TOPICS: MORE ON AVERAGES, CORRELATIONS, AND CONFIDENCE
INTERVALS
21 Data Preparation: Sourcing, Manipulation, and Integration
 21.1 INTRODUCTION
21.2 MODELING CONSIDERATIONS
21.3 OVERVIEW OF DATA MANIPULATION PROCESS
21.4 CLEANING EXCEL DATA SETS
21.5 INTEGRATION OF EXCEL DATA SETS
21.6 FURTHER TOPICS I: INTRODUCTION TO PowerQuery – APPENDING TABLES
21.7 FURTHER TOPICS II: INTRODUCTION TO PowerQuery – DATA MANIPULATION
21.8 FURTHER TOPICS III: INTRODUCTION TO PowerPivot AND THE DATA MODEL
Index
End User License Agreement

List of Illustrations
Chapter 1
Figure 1.1 Influence Diagram of a Simple Revenue Model
Figure 1.2 Excel Model That Contains Formulas but No Values
Figure 1.3 Excel Model with Input Cells Populated with Values
Figure 1.4 Input Cells with Color‐Coding
Figure 1.5 Using a Model to Compare Sales Revenues for Business Design Optio...
Chapter 2
Figure 2.1 Basic “Go/No Go” Decision with Sub‐Options
Figure 2.2 Using the Decision to Design the Model That Supports the Decision
Figure 2.3 Using a Sensitivity‐Based Thought Process to Define Model Variabl...
Chapter 3
Figure 3.1 Core Menu Tabs
Figure 3.2 The Home Tab (left‐hand‐side only)
Figure 3.3 The Formulas Tab (left‐hand‐side only)
Figure 3.4 Example of the SUM Function
Figure 3.5 The Insert Function Menu
Figure 3.6 The IF Function and Its Arguments
Figure 3.7 Entering the UNIQUE Function in a Single Cell
Figure 3.8 The Dynamic Output Range of the UNIQUE Function
Figure 3.9 Using # To Refer to a Dynamic Output Range
Figure 3.10 The Calculation Options on the Formulas Tab
Figure 3.11 Effect of Changes to Input Values in Manual Setting
Figure 3.12 Accessing the Menu Using KeyTips
Figure 3.13 Selecting a Range to be Copied
Figure 3.14 Results After Pasting
Figure 3.15 The Adjusted and Completed Model
Figure 3.16 The Paste Special Menu
Figure 3.17 Central Costs Allocated According to Trips
Figure 3.18 Formulas Used to Allocate Central Cost
Figure 3.19 The Formulas/Formula Auditing Menu
Figure 3.20 The Formula View
 Figure 3.21 Using Trace Dependents and Trace Precedents
Figure 3.22 Inspecting a Formula Using the F2 Key
Figure 3.23 The Watch Window
Figure 3.24 Using the Name Manager
Figure 3.25 Simple Model with Named Inputs
Figure 3.26 The Name Box
Figure 3.27 Accessing the Go To (F5) Functionality
Figure 3.28 Diagonal Dependency Paths
Figure 3.29 Horizontal and Vertical Dependency Paths
Chapter 4
Figure 4.1 Accessing a DataTable Using Data/What‐If Analysis
Figure 4.2 Recap of Cab (Taxi) Business Profit Model
Figure 4.3 Three Raw DataTable Structures
Figure 4.4 Completing a Two‐Way DataTable
Figure 4.5 The Completed Two‐Way DataTable
Figure 4.6 The Raw DataTable Structures for DataTables with Multiple Outputs
Figure 4.7 Summary Area with Selection Menu
Figure 4.8 DataTable with Choice of Outputs to Analyze
Figure 4.9 Using Data Validation to Restrict a User's Choices to Valid Items...
Figure 4.10 Model Inputs Are Replaced by Cell References to the Scenario Cho...
Figure 4.11 Implementing the Scenario Results Using a DataTable
Figure 4.12 Simple Example of Variance Analysis
Figure 4.13 Example of Using GoalSeek
Chapter 5
Figure 5.1 Basic Growth Forecast
Figure 5.2 Historical Information and Growth Forecasting
Figure 5.3 Common Layout of Growth Forecasting
Figure 5.4 Multi‐period Forecast Using the Common Layout
Figure 5.5 Reducing the Number of Separate Input Assumptions
Figure 5.6 Full Separation of Inputs from Calculations
Figure 5.7 DataTable of Year 5 Revenues to Two Growth Assumptions
Figure 5.8 Using Inflation as a Separate Item
Figure 5.9 Comparison of Measurement and Forecasting Results
Figure 5.10 Raw Data on Growth Rates Measured by Each Method
Figure 5.11 Calculation of Total and Average Growth Using Each Method
Chapter 6
Figure 6.1 An Initial Five‐Year Model with Quarterly Periods
Figure 6.2 Summary of Five‐Year and Specified Year
Figure 6.3 Using Flag Fields to Find When a Target is Met
Figure 6.4 Using a DataTable for Items in the Summary Report
Figure 6.5 Setting a Conditional Format Rule
 Figure 6.6 Dependencies without Initialization Area
Figure 6.7 Use of an Initialization Area to Be Able to Have Consistent Formu...
Chapter 7
Figure 7.1 Historical Calibration and Ratio‐Based Forecast for a Flow Item...
Figure 7.2 Historical Calibration and Ratio‐Based Forecast for a Stock Item...
Figure 7.3 Using the Days, Equivalent Method
Figure 7.4 Price Forecast for the Example Model
Figure 7.5 Sales Revenue Calculation
Figure 7.6 Calculation of Fixed and Variable Costs
Figure 7.7 Calculation of EBITDA in the Simple Model
Figure 7.8 Calculation of CapEx Using a Volume‐Based Ratio and Inflation...
Chapter 8
Figure 8.1 Framework for a Corkscrew Structure
Figure 8.2 Linking of CapEx into the Corkscrew Structure
Figure 8.3 Linking of CapEx into the Corkscrew Structure
Figure 8.4 Completion of Structure for the First Period
Figure 8.5 Completed Structure with Dependency Paths Shown
Figure 8.6 Basic Ratio Analysis of Assets to Sales
Figure 8.7 Calculation of Net Flow Items
Figure 8.8 Core Structure of a Reverse Corkscrew
Figure 8.9 Inclusion of One Flow Item
Figure 8.10 Completion of Both Flow Items
Chapter 9
Figure 9.1 General Split Using the MIN Function
Figure 9.2 Two Category Waterfall Split – Vertical Layout
Figure 9.3 Two Category Waterfall Split – Horizontal Layout
Figure 9.4 Capacities of the Multiple Layers
Figure 9.5 Completed Calculations of Multiple Layer Example
Figure 9.6 Waterfall Structure for Tax Calculation
Figure 9.7 Vertical Waterfall Structured by Item
Figure 9.8 Time Axis on a Vertical Waterfall Structured by Item
Figure 9.9 Vertical Waterfall Structured by Band
Figure 9.10 Capital Return Waterfall with Single Threshold
Figure 9.11 Capital Return Waterfall with Alternative Value
Figure 9.12 Capital Return Waterfall with Alternative Value
Chapter 10
Figure 10.1 Overview of Model with Interpolated Growth Rates
Figure 10.2 The Formula Used in Cell H11
Figure 10.3 Proportional Smoothing with Flexible Period Start
Figure 10.4 Logic Flow for Each Forecast Formula
Figure 10.5 Formula Used in Cell H8
 Figure 10.6 Example of the Effect of a Combined Smoothing
Figure 10.7 Triangle Inputs: Time‐Specific Purchases and Generic Time Alloca...
Figure 10.8 Time‐Specific Allocations (Step 1)
Figure 10.9 Time‐Specific Allocations (Step 2)
Figure 10.10 Triangle Outputs Feeding a Corkscrew
Chapter 11
Figure 11.1 Model Used for Single‐Period Analysis
Figure 11.2 Cost Structure as Volume is Varied
Figure 11.3 Revenue, Cost, and Profit as Volume is Varied
Figure 11.4 Thresholds and Combinations to Achieve Breakeven
Figure 11.5 Time‐Based Forecast from Sales to EBITDA
Figure 11.6 Completed Model with Forecast to Cash Flows
Figure 11.7 Completed Set of Calculations
Figure 11.8 The Formula View of the Completed Calculations
Chapter 12
Figure 12.1 Example of Compounded Interest Calculations
Figure 12.2 Example of the EFFECT Function
Figure 12.3 Effective Periodic Rates for Different Compounding Frequencies
Figure 12.4 Use of FVSCHEDULE Function
Figure 12.5 Yield Curve Bootstrapping Assumptions and Context
Figure 12.6 Yield Curve Bootstrapping Results
Chapter 13
Figure 13.1 Use of the Derived Formula to Calculate an Effective Rate Given ...
Figure 13.2 Explicit Calculation of the Effective Rate Given Repayments
Figure 13.3 Example of the PMT Function
Figure 13.4 Function Arguments for the PMT Function
Figure 13.5 Explicit Calculation of Loan Repayment Using a Corkscrew Structu...
Figure 13.6 Payment Value with Start‐of‐Period Payments
Figure 13.7 Explicit Calculation When Payment Is at the Start of Each Period
Figure 13.8 Reversal of Natural Values when Using PMT
Figure 13.9 Verification of Calculations Using Sign Reversal
Figure 13.10 Examples of the RATE, NPER, FV, and PV Functions
Figure 13.11 Rates When the Loan Period Is a Multiple of the Compounding Per...
Chapter 14
Figure 14.1 The Assumed Cash Flow Profile for a Discounting Example
Figure 14.2 The Assumed One‐Year Discount Rates
Figure 14.3 Possibilities to Calculate the Discount Factors
Figure 14.4 The Discounted Cash Flows and the Total
Figure 14.5 Constant Discount Rate with Explicit Profile
Figure 14.6 Use of the NPV Function
Figure 14.7 Valuing an Annuity by Explicit Calculation of the Cash Flows
 Figure 14.8 Application of the Annuity Formulas
Figure 14.9 Input Assumptions for Two‐Stage Terminal Value Calculation
Figure 14.10 Implementation of Two‐Stage Terminal Value Calculation
Chapter 15
Figure 15.1 Percentage Returns Calculated Explicitly in a Simple Case
Figure 15.2 Returns Expressed on a Per‐Period Basis
Figure 15.3 Example with Payback Occurring in Two Periods
Figure 15.4 Inflating or Discounting Cash Flows to Achieve a Total Value of ...
Figure 15.5 Using the IRR Function
Figure 15.6 IRR with Several Periods of Investment and Payback
Chapter 16
Figure 16.1 Threshold Level for Debt‐Equity Substitution and without Taxes...
Figure 16.2 Threshold Level for Debt‐Equity Substitution and without Taxes...
Figure 16.3 The Leverage Effect of Debt on Returns to Equity (at Book Value)
Figure 16.4 Effect of Debt with Taxes
Figure 16.5 Effect of Debt If Charges Were Not Offset Against Taxes
Figure 16.6 Generic Effect of Leverage on Cost of Capital: Equity, Debt, and...
Figure 16.7 A Simple Example of the Calculation of the Expected Return
Chapter 17
Figure 17.1 Income Statement for Simple Model
Figure 17.2 Cash and Equity Corkscrews
Figure 17.3 The Balance Sheet for the Base Case
Figure 17.4 The Balance Sheet with a Lower Initial Capital Injection
Figure 17.5 Implementation of the Adjustment Mechanism
Figure 17.6 Completion of Statements to Reflect the Equity Injection
Figure 17.7 Example of Adding an Accounts Receivable Functionality
Chapter 18
Figure 18.1 Forecast to the NOPAT line
Figure 18.2 Calculation of the Value in the Explicit Forecast Period
Figure 18.3 Terminal Value Calculation
Figure 18.4 Total Enterprise and Equity Value
Chapter 19
Figure 19.1 Generic Example of DuPont Analysis Using Linear Scales
Figure 19.2 Variations Analysis Using Component Parts
Chapter 20
Figure 20.1 Raw Data for Input to the Statistical Functions
Figure 20.2 Examples of the Use of AGGREGATE
Figure 20.3 Using AGGREGATE with its Fourth Argument
Figure 20.4 Augmented Data Set with Month and Year Information
Figure 20.5 Use of the AVERAGEIFS Function
Figure 20.6 Data Set with Field Headers
 Figure 20.7 Example of a Criteria Range for a Database Function
Figure 20.8 Function Arguments for the Database Functions
Figure 20.9 Results of Applying the Database Functions
Figure 20.10 Data Set for Correlation and Regression Analysis
Figure 20.11 X‐Y Scatter Plot with Trendline Displayed
Figure 20.12 Calculation of Slope, Correlations, and Standard Deviations
Figure 20.13 Creating a Table
Figure 20.14 The Table Design Tab
Figure 20.15 Entering a Formula That Will Refer to a Table
Figure 20.16 Completed PivotTable with a Row Structure
Figure 20.17 First Step to Insert a PivotTable
Figure 20.18 Completion of Step‐by‐Step Creation of a PivotTable
Figure 20.19 Population of the PivotTable Structure
Figure 20.20 Results of the LINEST Function
Chapter 21
Figure 21.1 Raw Data and Desired Transformation
Figure 21.2 Calculation Steps for One Item, Shown in a Column
Figure 21.3 Row Form of the Calculations and Results
Figure 21.4 Data Including Transaction Values in Local Currency
Figure 21.5 Tables with Additional Information That Need to Be Referenced
Figure 21.6 Augmented Main Table Showing Country Names
Figure 21.7 Main Table with Further Augmentation
Figure 21.8 The Completed Flat Table
Figure 21.9 Results of Appending Two Tables to Create a Third
Figure 21.10 The PowerQuery Editor
Figure 21.11 Selecting to Create a Connection Only
Figure 21.12 Queries & Connections Before Appending
Figure 21.13 Using the Table.Combine Operation
Figure 21.14 Using PowerQuery for the Full Process
Figure 21.15 Tables and Their Relationships within the Data Model
Figure 21.16 Creation of a Measure
Figure 21.17 PivotTable that Displays the Value of a PowerPivot Measure
THE ESSENTIALS OF FINANCIAL MODELING IN EXCEL
A CONCISE GUIDE TO CONCEPTS AND METHODS

Michael Rees
This edition first published 2023
© 2023 Michael Rees
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Library of Congress Cataloging‐in‐Publication Data
Names: Rees, Michael, 1964‐ author.
Title: The essentials of financial modeling in Excel: a concise guide to concepts and methods / Michael Rees.
Description: Hoboken, NJ: John Wiley & Sons, Inc., 2023. | Includes index.
Identifiers: LCCN 2022043302 (print) | LCCN 2022043303 (ebook) | ISBN 9781394157785 (paperback) | ISBN
9781394157792 (adobe pdf) | ISBN 9781394157808 (epub)
Subjects: LCSH: Finance—Mathematical models. | Corporations—Finance—Mathematical models. | Microsoft
Excel (Computer file)
Classification: LCC HG106. R439 2023 (print) | LCC HG106 (ebook) | DDC 332.0285/554—dc23/eng/20220908
LC record available at https://lccn.loc.gov/2022043302
LC ebook record available at https://lccn.loc.gov/2022043303
Cover Design: Wiley
Cover Image: © Skylines/Shutterstock
This book is dedicated to Elsa and Raphael.
About This Book

This book provides a concise introduction to financial modeling in Excel. It aims to provide readers with a well‐
structured and practical tool kit to learn modeling “from the ground up.” It is unique in that it focuses on the
concepts and structures that are commonly required within Excel models, rather than on Excel per se.
The book is structured into six parts (containing twenty‐one chapters in total):
Part I introduces financial modeling and the general factors to consider when designing, building, and using
models.
Part II discusses the core features of Excel that are needed to build and use models. It covers operations and
functionality, calculations and functions, and sensitivity and scenario analysis.
Part III covers the fundamental structures and calculations that are very frequently used in modeling. This
includes growth‐based forecasting, ratio‐driven calculations, corkscrew structures, waterfalls, allocations,
triangles, and variations of these.
Part IV discusses economic modeling, measurement, and evaluation. It covers the analysis of investments,
interest calculations and compounding, loan calculations, returns analysis, discounting, and present values.
Part V treats the core applications of modeling within corporate finance. It covers the cost of capital, the
modeling of financial statements, cash flow valuation, and ratio analysis.
Part VI covers statistical analysis, as well as data preparation, manipulation, and integration.
Readers will generally obtain the maximum benefit by studying the text from the beginning and working through
it in order. It is intended that the reader builds from scratch the models that are shown, to reinforce the learning
experience and to enhance practical skills. Of course, there may be areas which are already familiar to some
readers, and which can be skim‐read. Nevertheless, the text is intended to be concise and practical, and to contain
information that is potentially useful even to readers who may have some familiarity with the subject.
Although the text is focused on the essentials, at various places it briefly highlights some aspects of more
advanced topics. These are described in Further Topics sections, which are situated at the end of some chapters.
These sections can be skipped at the reader's discretion without affecting the comprehension of the subsequent
text. Note that another of the author's works (Principles of Financial Modelling: Model Design and Best Practices
Using Excel and VBA, John Wiley & Sons, 2018) discusses in detail some topics that are only briefly (or not)
covered in this text (notably VBA macros, optimization, circularities, named ranges, and others). For convenience,
in the current text this other text is occasionally mentioned at specific places where it contains significant
additional materials related to the discussion, and is subsequently referred to as PFM.
The Author

Dr. Michael Rees is a leading expert in quantitative modeling and analysis for applications in business economics,
finance, valuation, and risk assessment. He is Professor of Finance at Audencia Business School in Nantes
(France), where he teaches subjects related to valuation, financial engineering, optimization, risk assessment,
modeling, and business strategy. His earlier academic credentials include a Doctorate in Mathematical Modelling
and Numerical Algorithms, and a BA with First Class Honours in Mathematics, both from Oxford University in
the UK. He has an MBA with Distinction from INSEAD in France. He also studied for the Certificate of
Quantitative Finance, graduating top of the class for course work, and receiving the Wilmott Award for the highest
final exam mark. Prior to his academic career, he gained over 30 years' practical experience, including in senior
roles at leading firms in finance and strategy consulting (JP Morgan, Mercer Management Consulting, and Braxton
Associates), as well as working as an independent consultant and trainer. His clients included companies and
entrepreneurs in private equity; auditing and consulting; finance; banking and insurance; pharmaceuticals and
biotechnology; oil, gas, and resources; construction; chemicals; engineering; telecommunications; transportation;
the public sector; software; and training providers. In addition to this text, he is the author of Principles of
Financial Modelling: Model Design and Best Practices Using Excel and VBA (2018); Business Risk and
Simulation Modelling in Practice: Using Excel, VBA and @RISK (2015); and Financial Modelling in Practice: A
Concise Guide for Intermediate and Advanced Level (2008).
Part One
Introduction to Modeling
1
Modeling and Its Uses

1.1 WHAT IS A MODEL?

A financial model is a representation of a real‐life situation in business, economics, or finance. That is, it identifies
the items that represent the core properties of the situation and expresses the relationships between these. For
example, there is a relationship between the price per unit, the volume sold, and the sales revenue of a business.
This can be captured visually in an influence diagram (Figure 1.1).
From a pure theoretical perspective, the relationship can be defined more precisely using a formula:

(Where V is the volume sold, P is the average price achieved per unit, and S is the sales revenue.)
It is worth noting that the arrows in Figure 1.1 indicate the directionality of the logic. (For convenience, such
diagrams would use the “natural” left‐to‐right flow wherever possible.) On the other hand, in the formula, the logic
is “right‐to‐left”: In the context of numerical computations (and modeling), the = sign is used to mean that the item
on the left (called the output) is calculated from those on the right (called the inputs). In other words, although
from a purely mathematical perspective the left‐ and right‐sides of the formula could be reversed, this would not
be possible from the perspective of modeling, where formulas act not only as a statement of mathematical equality,
but also of directionality.

Figure 1.1 Influence Diagram of a Simple Revenue Model

An Excel worksheet can be used to represent the situation in a very similar way (i.e. to capture only the
relationships). For example, Figure 1.2 shows the formula (in cell C4) that calculates Sales Revenue by
multiplying the value of the Price per Unit (cell C2) with that of the Volume in Units (cell C3), even as the input
cells (i.e. C2 and C3) are currently blank.
Figure 1.2 Excel Model That Contains Formulas but No Values
In Excel, the * symbol is used for multiplication, so that the formula can be thought of as:

The presentation of the value of cell C4 reinforces that C2 and C3 are the inputs (on the right), with C4 being the
output (on the left).
Of course, if one were interested in representing the relationships from a theoretical perspective only, then Excel
would be a relatively ineffective way to do so (i.e. one would be better using mathematical formulas directly in a
text document). In practical applications, a worksheet (model) will be populated with actual input values, which
are relevant for the specific situation under consideration. For example, Figure 1.3 shows the same model but
where the input cells (C2 and C3) contain specific values, so that cell C4 calculates the Sales Revenue that
corresponds to that situation.
The input values can be entered or altered by the modeler (or by another user of the model). For this reason, when
working in Excel, it is good practice to make a clear distinction between inputs and calculations (formulas), so that
a user knows which items can be changed (and which should not be). Figure 1.4 shows an example of using the
shading of a cell to make such a distinction (while perhaps less clear in the black and white image, in addition to
the background shading, the font of such a cell can be a different color to that of the font used of a calculated cell,
in order to increase the distinction further).

Figure 1.3 Excel Model with Input Cells Populated with Values
Figure 1.4 Input Cells with Color‐Coding
Note that in mathematical formulas, each item (such as P, V, or S) represents both the name and the value of that
variable. However, in Excel, by default a formula is “stand‐alone,” and is created directly with reference to the
values of the items. That is, a formula is given meaning (or context) by the labels that are used in other cells. For
example, in Figure 1.4, cell C2 contains a value (10), but we know that this represents the price because of the
label that is entered in cell B2. Similarly, we know that the value in C3 represents the volume by reference to the
label in B3. Similarly, the label in B4 for the sales revenue is an appropriate label for the value in C4 simply
because the value is calculated by multiplying price with volume (rather than, say, adding them). In fact, in Excel,
it is possible to combine these roles (i.e. of the label and the value) by naming the cells (such as naming cell C2
“Price,” cell C3 “Volume” and C4 “Sales Revenue”). This is discussed in Chapter 3 in more detail.
Of course, the input values should be appropriate for the situation that is being addressed. Further – as an entry
into a cell of Excel – each input value is a single number (in principle). The output is also a single number that is
calculated from the inputs. The terms “base case” or “central case” are often used to refer to this single core
“reference” case, which in principle should represent a realistic scenario for the values that may arise (other
scenarios can be defined and stored in the model, such as optimistic or pessimistic cases; see Chapter 4).
In fact, very often, the value used for an input is simply a best estimate or a judgment, or a figure that is derived
from a comparable situation, or from analyzing historical data. Therefore, there may be some uncertainty as to the
true value. Similarly, some inputs may represent items over which a decision‐maker has some control in real‐life
and therefore relate to a decision or choice (rather than being uncertain). These situations can be captured by using
various values for the input assumptions to create scenarios, meaning also that there will be a range in values for
the output. In fact, the creation and analysis of the possible range of outcomes is an important part of using
modeling in decision support. The methods to do so range from the simplest (e.g. copying the model several times,
using different input values for each), to specific sensitivity‐analysis functionality within Excel (covered in
Chapter 4), as well as to more advanced approaches, including risk analysis, simulation, and optimization analysis
(which are mentioned in the Further Topics Sections in Chapter 4 and Chapter 20).

1.2 WHAT ARE MODELS USED FOR?

Models can be used to try to gain a better understanding of (or insight about) a real‐life situation, with the aim of
making a more informed decision in relation to it. For example, one may be deciding whether to launch a business
or not. Within the overall decision, there may be several sub‐options:
A mid‐market “base” business design (reasonable prices and volumes)
A “premium” focus (higher prices but achieving lower volumes)
A “mass‐market” approach (lower prices and achieving higher volumes)
Figure 1.5 Using a Model to Compare Sales Revenues for Business Design Options
Assuming that one can estimate the volume of consumers’ purchases that are likely at each price point (or use
market research to do so), the model could be used to capture the effect (on sales revenues) of each option. Figure
1.5 shows an example.
(Note that for simplicity of presentation at this stage, the model has been created three times, i.e. in each column
C, D, and E, using the common set of labels in column B. However, in practice the model would typically be
created only once, and a sensitivity or scenario analysis would be used to show the different cases.)
Also, of course, in a real‐life situation, there would almost certainly be more factors to consider. For example, the
decision to launch the business (and with which design) would no doubt also need to reflect the costs and the
potential to make a profit (not just the sales revenue). Models should therefore be designed so that they include
and evaluate the key decision criteria (as discussed in depth in Chapter 2).
The set of applications of modeling is too numerous to list fully, but includes forecasting, business planning,
investment analysis, valuation, target setting, credit assessment, portfolio selection, and optimization, and risk
analysis. Within each of these, there are many variations, since most businesses or decision contexts have specific
features that need to be captured. Nevertheless, there are numerous concepts which are common to many
situations, as well as calculations and types of structures that are frequently used in Excel to implement these. The
focus of this text is to treat these essentials in detail.
2
Principles of Model Design

2.1 INTRODUCTION
Modeling activity takes place within an overall context and a wider set of business processes. At a high level, the
main steps to consider when planning and building a financial model for decision support are:
Identifying the decision and its structure, options, and criteria.
Mapping the elements of real‐life that should be captured, including the variables and logic flow.
Building and testing the model.
Using relevant external data.
Using the results, including presentation, graphics, sensitivity analysis, reports, and documentation.
This chapter explores these topics, discussing the core principles of each point and the main practical issues. Note
that in this chapter, the discussion is still quite generic; in fact, most of the principles apply whether a model is to
be built in Excel or in some other platform. However, the rest of the book (from Chapter 3 onwards) is devoted to
implementing these within the Excel environment.

2.2 DECISION IDENTIFICATION, FRAMING, AND STRUCTURE

A model is generally used to support a decision process in some way. Therefore, it is important to establish what
decision is being addressed, what are the objectives, and what are the constraints or limitations that must be
respected.
A common failing of decision processes is known as the “fallacy of choice”: This is where what would have been
the best decision option is not considered at all. Clearly, for a model to be most useful, it must also reflect the
relevant decision and the most appropriate or best option(s).
Generically, one may think of a decision as having a binary structure (“go or no go?”). Most commonly, Excel
models reflect this: The model represents the “go” option, whereas the “no go” option is not modeled explicitly
(i.e. it is implicitly considered as being neutral or evaluating to zero).
It is also frequently the case that (within the “go” option) there are set of sub‐options which each have the same
structure. That is, there is only one model, and the sub‐options are captured as scenarios (each simply using
different input values). If there were major structural differences between the sub‐options then a different model
would be required for each (and, in that case, they are strictly speaking not sub‐options at all). Figure 2.1
illustrates this for the situation discussed in Chapter 1 (see Figure 1.5 and the associated discussion).
Other types of decision structures include allocations or optimizations (e.g. how much capital shall we allocate to
project A, and how much to project B?), multiple structurally different options (such as whether to renovate one's
house, buy a new car, or go on vacation), and decision sequences (e.g. using a phased approach rather than making
a single up‐front decision). These may require more advanced models and tools to properly address them.
However, the core points are that the appropriate decision needs to be identified and that the model should reflect
the structure of the decision situation.
Figure 2.1 Basic “Go/No Go” Decision with Sub‐Options

2.3 DECISION CRITERIA AND INFORMATION NEEDS

There are many ways that a decision could be made, or a decision option selected. The least structured is using
“gut feel,” which is essentially a subjective method. A more robust process is to make the criteria explicit and to
evaluate these as objectively as possible (often quantitatively).
In principle it should be self‐evident that a model should be designed so that it calculates (or contains) the values
of the decision criteria (or metrics) that are to be used by the decision‐maker. Figure 2.2 depicts the idealized
modeling process. It starts with identifying the decision, with the nature of the decision then determining the
decision criteria (metrics). These are used to determine the design requirements, allowing the model to be built so
that it evaluates the criteria, with the results used to support the decision.
It is also worth noting that a “gut feel” decision process is often one where the process of decision identification is
incomplete and potentially subject to the fallacy of choice. In addition, it may be considered as one in which there
is a direct route from decision identification to decision‐making (i.e. a route directly downwards from the top‐left
box to the bottom‐left one in Figure 2.2).
Common decision criteria used in economic analysis include measures relating to:
Breakeven analysis (such as time‐to‐breakeven and payback periods).
 Figure 2.2 Using the Decision to Design the Model That Supports the Decision
Returns (such as the internal rate‐of‐return, the return‐on‐capital) and net present values).
Ratios (such as profit/sales, or sales/assets, and so on).
In some cases, one may wish to focus on a specific item only and maximize or minimize this. For example, one
may wish to choose the option which has the maximum revenues, that which has the minimum cost, or that with
the minimum risk, and so on. Clearly, these criteria could lead to different decision choices. For example, in day‐
to‐day life, the choice to go on the cheapest vacation possible would likely lead to a different selected vacation
than if one sought to choose the vacation option by considering both the costs and benefits (such as the quality of
the hotel one is staying in). Similarly, in a business context, the option that maximizes revenues may require
making significant up‐front investments that would not be acceptable if criteria such as profitability or financing
constraints were considered.
Note that while one may initially interpret “decision criteria” in a pure economic sense, the term should be thought
of in a wider context (i.e. the full information needs of decision‐makers). These would typically also include that a
sensitivity or scenario analysis (or a full risk assessment) be conducted. That is, one would aim to establish the
likely ranges for the decision criteria (such as the range of value for the time‐to‐breakeven, or for the return‐on‐
capital, and so on). This is discussed further in the next section.
Similarly, in practice, some decision criteria may initially be overlooked when a model is first built: It is possible
that the criteria are not understood initially, or that the information needs of decision‐makers change over time
after some initial results have been reviewed, or that further information about the market or competition has
become available, and so on.
Finally, some decision elements (e.g. relating to ethical or moral issues) may not be able to be evaluated by
quantitative analysis (i.e. cannot be included in a model). In these cases, some judgment by the decision‐maker is
likely to be required. However, the core point is that when planning a model, one should take some time to reflect
on a wide set of likely decision criteria that may ultimately be needed, and to build the model so that these are
evaluated, at least as far as possible.
2.4 SENSITIVITY‐BASED DESIGN
Sensitivity analysis is the exploration of the changes that occur to the value of a calculated item when one or more
of the input value(s) is changed. It is a key part of decision support, as it can:
Help to understand the conditions under which a decision makes sense (or not). For example, while a base
case may indicate that a “go” decision is preferable (to “no go”), a sensitivity analysis could identify that this
is true only if costs do not rise by more than 10%.
Establish the range of likely outcomes and generally to assess the potential upsides and downsides.
Identify the relative importance of the key input variables, and hence the effectiveness of potential
management actions that could be used to maximize (or optimize) the overall result while mitigating or
reducing risk.
A seemingly obvious – but often overlooked – point is that sensitivity analysis should be considered before the
model is built (i.e. as a planning and design tool): If it is considered only afterwards, the model may have been
built in a way which does not allow the necessary sensitivities to be run! The approach to implementing sensitivity
techniques varies according to the stage within the modeling process:
At the design and planning stage, it revolves around identifying as precisely as possible the sensitivities that
will need to be run later. This can help to define the variables that should be included in the model, their roles
as inputs or outputs (i.e. the logic flow), as well as the level of detail or granularity that is needed.
When a model is being built, it can be used to verify and test its general behavior, notably by checking that
the relationships that are present in the real‐life situation are reflected properly. It can also be used to develop
and check complex calculations, by testing their results at various values (ideally a combination of simple
values, extreme values, and values which are critical in how the formulas would evaluate).

Figure 2.3 Using a Sensitivity‐Based Thought Process to Define Model Variables

Figure 2.3 shows a simple illustration of the use of a sensitivity thought process in model design and planning.
When creating a model forecast of Sales Revenue, there could be several fundamentally different approaches to
the choice of variables and the logic used. These include:
Volume multiplied by Price.
Market Size multiplied by Market Share.
Sum of the Sales Revenue per Customer (or per product, geographic region, etc.).
By considering the nature of the sensitivity analysis that will be needed when the model is complete, one should be
able to see which of these is most appropriate or what variations of one of them may be required. (The process
could also highlight that none of these options are suitable and that other modeling approaches should be
considered.)

2.5 DATA AND DATA SOURCES

As noted in Chapter 1, models almost always not only capture the relationships between items, but also have input
fields that are populated with relevant values or actual data. In some cases, the values used for the inputs may
simply be a best estimate or a judgment made by an expert (e.g. for a bespoke or unusual project where little
historical or comparable information is available). In such a case, the process of data integration may be so simple
that it may barely be thought of as one that requires specific consideration or techniques. On the other hand, in
very advanced applications (such as machine learning), one may need to automate the sourcing, manipulation,
integration, and analysis of large data sets that are stored on external servers, and which are being frequently
updated. Therefore, while some data analysis is usually required as part of the overall modeling activity, its nature
could range from simple to complex, highly advanced analytics. In general, one is commonly faced with a
situation that is in between these two extremes: Frequently, some data is available and needs to be analyzed or
summarized to inform the values used for the model assumptions. For example, when building a forecasting model
to value a business based on its expected profitability over the next 5 to 10 years, it may be sufficient to forecast
the operating costs at an aggregate level only (e.g. the total cost by category in each quarter or year), even as the
business's IT and accounting systems may be able to provide a much more detailed breakdown of the historical
cost of every line item. Similarly, regression or correlation analysis may be needed to explore or determine
relationships between variables that may be needed within the model.
From the point of view of model planning and design, when faced with a modeling situation, it is useful to ask
questions such as:
The overall role and importance of data to the model. How much data is available, and from what types of
sources? What would the data be used for?
How is the data structured? How many data sets are there? Where are they located? How can they be
accessed? How large are they?
Is the data “clean” and consistent? How accurate is it? Could it contain errors, or need correction? Would
some form of manipulation or integration be required?
How often will the data be updated, and will the model also need to be updated as often?
The answers to these questions will help to form a clear picture of the data and logical structures and of the
techniques that are required to implement a model. These are discussed in detail in Part VI.

2.6 MODEL MAPPING AND APPROXIMATIONS

The term “mapping” refers to the translation of the core aspects of the real‐life situation (and the relationships
within it) into the model. This requires one to define:
The variables to be used and their role (inputs, calculations, outputs).
The overall logic and flow.
The level of detail (granularity) of these, such as whether the revenues are broken down for each individual
product, whether the time axis is annual or monthly, and so on.
From a practical point of view, it is often best to start with items that relate to operational and investment issues
(such as prices, volume, revenues, operating costs, investment needs, and so on) before capturing the full impact of
these on cash flows and on the consequences for the financing.
The mapping process is not to be done in isolation: It should consider the issues mentioned earlier (notably the
decision structure and criteria, the use of sensitivity analysis as a thought‐process, and the availability and use of
data sets). The process also requires that the modeler has an adequate knowledge of the area of application, in
order to understand the behavior and relationships within the real‐life situation. For this reason, this text aims to
provide some core elements of this for a range of common application areas. (However, in a specific case that one
is faced with, it may be necessary to do extra research or study specific concepts in economics, finance, or
accounting in more depth.)
A model is usually an approximation or a simplification: There are typically aspects of a situation that cannot be
captured in full detail or rare scenarios that may occur in real life that are not reflected in the model. For example,
if a model uses price and volume as its underlying inputs (with revenues calculated as an output), then it provides
no tracing back (explanation or causality) of the fundamental factors that themselves determine the price or
volume. For example, in the case of a hotel business, an increase in interest rates may reduce business activity and
hence reduce both the price and the volume that may be able to achieve (as well as increasing its cost of
borrowing). By extending the logic of the model further “backwards” in the causality chain, one would create a
larger, more complex, and more detailed model. However, the inputs for the new model are still only potential
“starting points” for a yet larger model, and so on. Thus, even the most detailed model is unlikely to ever be able
to capture the full behavior of the real‐life situation in every possible situation that could arise, while the creation
of such a detailed model may involve significant work, and not necessarily be more accurate, nor provide
additional benefit or insight. A key skill (and objective) is to capture the key elements in a way that is sufficient to
fulfill the particular purpose at hand, notably to support the needs of decision‐makers. The phrases “Every model
should be as simple as possible, but no simpler” (adapted from a quote by Einstein), and “Every model is wrong,
some are useful” should also be kept in mind as potentially helpful guidelines.

2.7 BUILDING AND TESTING

There are several principles involved in building models in accordance with “best practices.” These include to:
Name the variables clearly.
Separate inputs from calculations.
Create transparency and clear logical flows.
Break complex calculations into components.
Use modular structures (largely self‐contained that contain closely related items, and which are linked
together with a relatively small set of links to create a whole).
Test the model robustly before applying it.
The implementation of these principles is often specific to the modeling platform used and are therefore discussed
in detail in the context of Excel in Chapter 3.

2.8 RESULTS PRESENTATION

The core principles of using model results for decision support include:
Presenting the situation and assumptions clearly.
Highlighting the key information needs that decision‐makers have, notably the evaluation of the decision
criteria and related reporting needs.
Showing the range of possible outcomes (e.g. through sensitivity, scenario, or risk analysis), and the levers by
which the outcome can be influenced.
Using graphical output as appropriate. Care should be taken to ensure that the most appropriate type of graph
is chosen and that the message that the chart is intended to convey is easy to see directly on the chart.
Providing adequate documentation. This should note the context in which the model is valid, or whether
adaptations are necessary as the decision situation or criteria changes.
Trying to minimize the effect of biases.
(Once again, most of these principles are covered in more detail in Chapter 3, to show their implementation in the
Excel environment.)

2.9 BIASES
Biases can impact decision identification and selection even if the right information has been given to decision‐
makers from a technical or objective perspective. The topic of biases is linked to human psychology (at the
individual and group level) and to evolution. While its scope is very large, important examples of biases include:
 The bias of “framing.” This means that – for the same situation – one would make a different decision
depending on how the information is presented.
The bias of “loss aversion.” This means that people are typically risk‐seeking to avoid losses, but risk‐averse
in the face of gains.
These biases can interact or overlap in their effects. For example, one may be reluctant to sell an investment (such
as a stock) that has decreased in value (i.e. to retain the investment rather than realizing its value by turning it into
cash). At the same time, if asked to increase one's holding of the same investment, one may also be reluctant to do
so. That is, one simultaneously prefers holding the investment rather than cash and holding cash rather than the
investment. Similarly, a business decision about whether to continue to invest in a poor project can be affected by
whether the focus is on loss‐avoidance (“We have invested so much that we can't stop now.”) rather than potential
gains (“Let's invest in the future of this highly uncertain project – after all, it could turn out well in the end.”). An
awareness of potential biases can be important to minimizing their effect. However, a full treatment of this rich
topic (and related aspects such as behavioral finance) is beyond the scope of this text.
Part Two
Essentials of Excel
3
Menus, Operations, Functions, and Features

3.1 INTRODUCTION
Excel is generally an excellent platform for most common financial modeling applications. It is easy to learn at a
basic level and can provide a transparent and flexible environment (if used well). It has many functions and
features, and new functionality is added regularly. In cases where one may need to conduct operations that are not
present in the default versions of Excel, these can often be found in the free shipped add‐ins or by using VBA
macros. (However, most of the applications where these would be needed are beyond the scope of this text.)
Finally, although there are areas of application where Excel may not be a practical tool for the final
implementation of a solution (such as if very high computational intensity is required to manipulate huge data sets
extremely quickly), it can often be a convenient platform to communicate and test the concepts or to develop
prototypes for these solutions.
This chapter aims to highlight the features of Excel that are indispensable to any modeler working in common
areas of application. It is intended to be a structured summary, not only to act as a guide for readers who are less
familiar with Excel, but also to form a checklist of core competences for those who already have some experience.
The topics covered relate to:
The structure and menus.
The creation of calculations.
The most important and frequently used functions (around 100 are highlighted; these are the functions used
later in the text).
The core operations that are needed to build, test, and use a model.
Calculation options and settings.
The use of shortcuts and KeyTips.
Best practices and the creation of transparency.
Auditing, testing, and the tracing of logic.
Using graphs and charts.

3.2 STRUCTURE AND MENUS

Some of the key points about the structure of Excel are:
An Excel workbook contains one or more worksheets. Each worksheet is made up of a tabular set of cells,
which are identified by a column‐row reference address (such as C5, to indicate the cell in the third column
and fifth row).
Each cell may be blank or have content entered into it, such as a number or text. Formulas or functions may
instead be entered; these conduct calculations that generally return numbers (but can return text, logical
items, or errors).
Typically, to create a calculation in a cell, the inputs are the values that are present in other cells. (Fixed
numbers can be embedded within formulas, but it is in general not good practice to do so.)
A set of cells that forms a rectangular structure (or range) can be referred to by using the cell address of the
first and last cells. For example, C5:E9 refers to the rectangular range which starts at cell C5 and ends at E9.
This allows for multiple cells to be referred to simultaneously.
As well as its value or content, a cell or range has other properties. These include the size and color of the
font, the type of shading (if any), and the type of border placed around it (if any).
The Excel toolbar contains several tabs, each of which has a descriptive title that relates to the types of menu
operations that are offered by the items on the tab. The core tabs are present by default when Excel is first installed
(see Figure 3.1).
Figure 3.2 shows the left‐hand‐side of the Home tab, which contains many frequently required operations.
Figure 3.1 Core Menu Tabs

Figure 3.2 The Home Tab (left‐hand‐side only)

Important operations available on the Home tab include:
Using Copy/Paste to copy the content of one cell to another.
Formatting the type, size, and color of the font used to show the content of a cell, or to add a border around
the cell.
Aligning the content of a cell (e.g. to be justified at the left, middle, or right).
Setting the ways that a numerical value should be displayed (e.g. number of decimal points, or as a
percentage, and so on)
Using Conditional Formatting, so that the value of a cell determines the way it is formatted (e.g. to show
negative values in red, or to suppress the display of zeroes).
Note also that there are additional tabs available in Excel, but which are generally hidden by default and can be
exposed if they are needed. The other core tabs (and any extra ones that may be needed) are discussed later (within
context as they are used).

3.3 CALCULATIONS USING ARITHMETIC

The arithmetic operators +, –, *, /, and ^, can be used to create calculations within a cell (+ for addition, – for
subtraction, * for multiplication, / for division, and ^ for raising to a power). The operator & is a simple way to
join two text strings. These are generally self‐explanatory (however, an example can be seen in the earlier Figure
1.2 (using the * operator), and many other examples are shown later.

3.4 FUNCTION BASICS

Functions perform pre‐built sets of calculations based on input values that the user has specified. Their role is:
To evaluate operations that cannot generally be done with direct arithmetic (such as the IF function).
To create more flexibility in the working environment, even where the operations could typically be
performed with arithmetic (such as the SUM function).
Figure 3.3 The Formulas Tab (left‐hand‐side only)
Figure 3.3 shows the left‐side of the Formulas tab. This can be used to access most functions, each of which is
assigned to a category that has a drop‐down menu. For example, using the drop‐down for the Math&Trig category
one would see several functions, including SUM (this step is not shown in the Figure).
Figure 3.4 shows a simple model about the operations of a single‐car taxi (or cab) service. The inputs and
calculations for the model are in column C (whilst column E shows the formulas used). The model calculates
revenues, costs, and profits for the business (using inputs such as price, number of trips per day, days per year, and
so on). The SUM function is used in cell C14 to add up the items in the two‐cell range C12:C13, in order to
calculate the total Fixed Cost.
Also note that:
The function can be used to add the value in only two cells. For example, in cell C16 the function could have
been used in the form SUM(C10, C14). Note that in this case, the input cells need to be delimited with a
comma. If a colon were used, i.e. SUM(C10:C14), then all cells in the range would be included in the
calculation (i.e. C10, C11, C12, C13, and C14).
 Figure 3.4 Example of the SUM Function
The shading in some cells is used to highlight (to a user) those calculations which are assumed to be of most
interest for reporting and decision‐making purposes (i.e. the “output” cells).
Rather than using the menu on the Formulas tab, a function can be inserted using the Insert Function menu icon,
which activates the menu from which one can choose a category and a function therein. Figure 3.5 shows this for
the IF function.
Selecting OK (as in Figure 3.5) will activate the Function Arguments, as shown in Figure 3.6.
The IF function requires that the modeler defines a condition that the function will test, as well as the values to
return when the condition is met or not. (If the user does not define the return values, then these are by default the
logical items TRUE or FALSE, depending on the results of the test.)
Figure 3.5 The Insert Function Menu

Figure 3.6 The IF Function and Its Arguments

3.5 A CORE FUNCTION SET

The two functions SUM and IF are extremely useful: With these alone, one could build a surprisingly large range
of models. Nevertheless, it is important to have good familiarity with a much larger set of functions. Some of these
are needed for general calculations, to capture conditionality and logic, to calculate specific items in finance and
economics, to conduct data and statistical analysis, and so on.
This section lists the functions that are used or referred to later in the text (where details of individual functions are
explained as required). This list may be considered as itemizing the core set of functions that are needed in
common applications (including some that are required for frequent aspects of data manipulation and analysis).
Functions which perform general calculations, including comparisons, conditionality, and aggregations include:
SUM, MIN, MAX, COUNT, COUNTA, AVERAGE, ABS, PRODUCT, POWER, SUMPRODUCT.
IF, IFS, SUMIFS (SUMIF), MINIFS, MAXIFS, COUNTIFS, AVER‐AGEIFS.
In both general financial modeling and data analysis, the following functions are indispensable:
CHOOSE, XMATCH, INDEX, and XLOOKUP form the “core set” of lookup and reference functions that
are useful in many common applications.
INDIRECT, ADDRESS, and CELL are used in more advanced applications, including relating to data
analysis and data‐driven model structures.
MATCH and LOOKUP are legacy functions that are no longer needed per se but were widely used and
important in earlier versions of Excel.
HLOOKUP and VLOOKUP are functions that are used by some modelers, but their use provides no benefit
compared to alternatives, and we do not recommend using them.
In calculations relating to growth or to interest rates one often needs:
EXP and LN are mathematical functions that calculate the exponential and the natural logarithm, and required
for calculations relating to continuously compounded processes, for example.
EFFECT, NOMINAL, and FVSCHEDULE are useful in general growth‐related calculations, including those
that relate to interest rates.
In quantitative financial analysis, data analysis, statistics, and probability, important functions are:
AGGREGATE is a “wrapper” function that embeds the capabilities of several statistical functions.
SUBTOTAL is similar, but with less features.
MODE.SNGL, SMALL, LARGE, RANK, STDDEV, PERCENTILE, CORREL, PEARSON, and
COVARIANCE are useful for statistical analysis. (There are several variations of some of these functions
which are not listed here.)
DSUM, DMAX, DAVERAGE, DCOUNT, DCOUNTA, and DGET are some of the main database functions.
LINEST, as well as SLOPE and INTERCEPT, can be used in regression analysis.
MMULT and MINVERSE are needed in matrix calculations (which are needed in optimization modeling,
credit analysis, and other areas).
FREQUENCY can be used to count the number of items in each bin of a defined set (as can COUNTIFS).
In economic analysis, important functions include:
NPV and IRR (as well as XNPV and XIRR) are used for general investment‐ and returns‐analysis.
PMT, RATE, NPER, FV, and PV (as well as IPMT, PPMT, CUMIPMT, and CUMPRINC) are used in relation
to the repayment of loans, such as mortgages.
Functions that can assist in general data cleaning and manipulation include:
CLEAN and TRIM are useful to clean up data that is imported from another system, for example that may
contain excess blank spaces or non‐visible characters.
FIND and SEARCH find a text field within (a larger) one.
REPLACE and SUBSTITUTE replace some text with an alternative.
LEFT, RIGHT, and MID return the associated part of a larger text field (e.g. left‐hand side).
LEN determines the length (number of characters) of a text item.
TEXT can be used to convert a number into a numerical‐looking text field, such as to link the labels of charts
to cells in Excel.
REPT can be used to repeat something several times.
TEXTJOIN is a flexible way to join several text fields (rather than using the & symbol or the
CONCATENATE function).
 UNIQUE, SORT, SORTBY, FILTER, and TRANSPOSE are useful in general modeling as well as data
analysis.
Finally, some functions that are useful in areas such as error‐management, model auditing and documentation, data
analysis, and other applications are:
TRUE and FALSE. These are logical items that are returned after a condition is checked. They are also
functions that have no parameters. The NOT function reverses the results of a condition that has been
checked.
AND and OR return the logical items TRUE or FALSE after checking several conditions simultaneously.
ISBLANK, ISLOGICAL, ISTEXT, ISNUMBER, and ISERROR return the logical items TRUE or FALSE
depending on the content of the cell to which they are applied. Their (implied) categories represent a set of
exhaustive and exclusive possibilities for the content of an Excel cell (e.g. blank, logical, etc.)
IFNA and IFERROR allow one to replace error values with alternative values.
FORMULATEXT can be used to display the formula that is used in another cell. This can be useful for
documentation and presentation purposes and is used extensively in the screen clips in this book.

3.6 FURTHER PROPERTIES AND USES OF FUNCTIONS

Functions are designed to be robust and to take as wide a variety of inputs as possible. In some cases, a function
may not return the values that one may initially expect, due to the way that “unusual” inputs are treated. For
example, when logical items (FALSE and TRUE) are used as inputs the results would be:
For arithmetic operations, the items are treated as if they were 0 or 1. Thus, the formula
=TRUE+TRUE+FALSE, will return two.
For the SUM function (and for many other functions) logical items are ignored. Thus, the formula
=SUM(TRUE, TRUE, FALSE) would return zero.
Whilst most functions are entered into a single cell and create results only in the same single cell, there are cases
where the output range of a function requires multiple cells. Examples include:
TRANSPOSE. This is entered into a single cell but returns a multi‐cell range which contains the transposed
value of the input range (i.e. with rows and columns switched). The size of the output range is the same as the
size of the input range but does not depend on the values within the input range.
UNIQUE. This provides a list of the unique values that are present within the input range. The size of the
output range depends only on these values (not on the size of the input range).
This property that the return range of Excel functions adjusts to the required size is sometimes referred to by
saying that functions have a “dynamic output range.”
Figure 3.7 shows an example of the UNIQUE function being entered (into cell D2), using the inputs from the
range of cells B2:B17.
Figure 3.8 shows the result (i.e. a range) which contains the list of those items in the input range that are unique.
Note that:
The #SPILL error message would be shown (in cell D2) if there were already content in the cells below D2
that would need to be overwritten when the dynamic output range is populated.
Figure 3.7 Entering the UNIQUE Function in a Single Cell
The # symbol can be used to refer to all the cells of a dynamic output range. For example, Figure 3.9 shows
the use of the symbol within the COUNTA function (in cell F2) to count the number of cells that contain
content within the dynamic range that starts at cell D2.
3.7 CALCULATION SETTINGS AND OPTIONS
It is important to be aware that Excel is typically (by default) set on its “Automatic” calculation mode. This is one
of the three core modes (or options), which are:
Automatic.
Automatic except for Data Tables.
Manual.
These can be seen in the Calculation area of the Formulas tab (see Figure 3.10).
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 “Weel, I gaed, an’ I better gaed. ‘The wind blew as ’twad blawn its
last;’ the fitfu’ changes o’ the shrouded moon threw flitting shadows
across my path;—whiles like a muckle colley, and syne as if I stood
on the brink o’ a dreadfu’ precipice, when I wad then stand still, till
the moon shone again. The bleachfield dogs sent round their lang,
uncanny bodings; the vera cocks crawed,—sic horror had the time;
the last leaves o’ hairst were driftin’ an’ clatterin’ amang my feet—
whiles hittin’ me like a whup on the face; or tappin’ me on the back,
as if ane wad say, ‘Saunders, this is death!’ when I wad then stand
stockstill again, my knees fechtin’ an’ thumpin’ at ane anither, and
my teeth gaun like a watchman’s rattle; while noos and thans, the
wind wad howl and birr, as if the Prince o’ Air himsel were pipin’ to
the clouds. I ne’er doubted thae things to be the bodings o’ death; but
I thocht sic feydoms might hae been better wared on a muckle better
man than me. At length I got to the house-door, as the laird’s messan
began to bark.
“‘Look to the door, Peggy!’ quo’ the gudewife.
“‘Ay, mither. Jock, look to the door for your mither, will ye no?’
“‘Look till’t yersel! Can I gang, when I’m greetin’ this way?—Pate—
look to the door!’
“‘I’m greetin’ too,’ says Pate.
“‘Peggy Mucklewham, will ye no look to the door, for your deein’
faither’s sake?’
“‘Tuts!’ quo’ Peggy, ‘Can ye not get up yersel—fashin’ folk?’
“Weel, I then got entrance—the sneck being cannily lifted, an’ the
bairns makin’ a breenge into a hidin’ corner, until, by the light o’ the
fire, they kent my face.
“‘Ou, it’s auld Saunders, as sure as death. Ay, man, my faither’s
real ill—he’s just gaspin’, and that’s a’! Hear till that—that’s him
whistlin’! Hae ye no brought Towzie wi’ ye? Man, Pate and me wad
hae’n sic grand fun chasin’ the mawkins, when my mither’s at the
kirk the morn.’
“‘Are ye sorry to lose your faither, bairnies?’ quo’ I.
“‘Ou, ay,’ quo’ Pate, ‘but I dinna like to look at him, he maks sic
awfu’ faces, man; but I hae been thrang greetin’, sin’ four o’clock
even on—twice as muckle’s Jock!’
 “A lang deep groan now was heard from out o’ the spence, whaur
the laird was lying; and the bairnies, in a fricht, ran screeching to
anither apartment, leaving the youngest wean by the fireside, rowed
in ane o’ the auld man’s black coats.
“‘Gude save us, lammie!’ quo’ I, ‘is there naebody tending your
puir auld faither? Whaur’s uncle, lammie? and aunty? and your
minnie, lammie?’ I mind weel the bit bairnie’s answer—‘Unkey a’
doon—aunty a’ doon—daddy a’ doon!’
“Mrs Mucklewham was a stout buirdly quean, like a house-end;
and the laird was just a bit han’fu’ o’ a cratur—a bit saxteen-to-the-
dizzen body. They were a pair o’ whom it was said, by the kintra-side,
that they had married afore they had courted. The laird was an auld
man when he brought hame a woman thirty years younger than
himsel;—auld folk are twice bairns, and he was beginning to need
nursing. It’s wonderfu’ to think how little a matter hinders
gentlebred folk frae getting on in the warld! A’ that Jenny
Screameger wantit o’ the complete leddy was the bit dirty penny
siller; an’ sae they were joined thegither, without its ever being
mentioned in the contract, or understood, that they bound and
obliged themselves to hae a heartliking for ane anither!
“She had been keepit by the gudeman geyan short by the tether;
sae as her hale life was made just a dull round till her—o’ rising and
lying down—eating, drinking, and sleeping—feeding the pigs, milking
the cow—flyting the servant—and skelping the weans a’ round;—
unless when she dreamed o’ burials, or saw a spale at the candle—or
heard o’ a murder committed in the neighbourhood—or a marriage
made or broken aff—or a criminal to suffer on the gallows; till at her
advanced time o’ life it was grown just as neccessar’ that food should
be gotten for her mind’s maintenance, as it was for her body’s.
“‘This is a sair time for ye, Mrs Mucklewhaum,’ quo’ I, as she cam
ben frae her bedroom gauntin’.
“‘Hey! ho! hy! Saunders—I haena closed an ee thae twa lang
nichts! But I hear there’s something gaun to be dune noo—Hey! ho!
hy!’
“I stappit ben wi’ her to the laird’s room; and I saw in his face he
was bespoken. Everything was laid out in the room, comfortable and
in apple-pie order, befitting the occasion. The straughtin’ board, on
whilk his death’s ee was fixed, stood up against the wa’; here lay a
bowt o’ tippeny knittin’ for binding his limbs, and as mony black
preens as wad hae stockit a shop; there hung his dead shirt, o’ new
hamespun claith, providently airing afore the fire.
“‘Gin ye be thrang, Saunders, ye needna wait on the gudeman—ye
ken his length—and gie him a deep biel,’ quo’ the gudewife; when
just as I laid my hand upon his brow, he fixed his ee upon me like a
hawk; an’ after anither kirkyard groan—the like I never heard from
mortal man—he seemed reviving, an’ new strength to be filling his
limbs, as he rose up on his elbow, on the bed, and laid his other hand
on mine—sic an icy hand as I never felt abune grund!—thus speaking
to me in his seeming agony:
“‘Saunders, do not pray for me; I have been long a dead man; lay
your hand upon my bosom, and you will feel the flames of hell
ascending to my soul!’ I laid my hand upon his heart, and I declare,
sir, I thocht the flesh wad hae cindered aff the finger-banes! The heat
was just awfu’!
“‘I was made life-renter of a sum which at my decease descends to
the younger branches of my father’s family; and my life has been
miserable to myself—a burden to others—and my death the desire of
my kindred!’
“‘He’s raving, Saunders—he’s clean raving! An’ I canna persuade
him he’s a deein’ man,’ quo’ Mrs Mucklewham, as she stapped forrit
wi’ a red bottle, to gie him a quatenin’ dram.
“‘Haud, haud!’ quo’ I, ‘he’ll do without it,’ as the laird, raising his
voice, began again to speak:
“‘I had but one friend in the world,—the highwayman that robbed
me, and then laid my skull open with the butt-end of his whip;—
would to God he had made me a beggar, and saved my soul! I had no
worse wish to bestow on him than that he might be a life-renter for
his poor relations. Saunders, look on the face of that unfeeling
woman—more horrible to me than death itself;—look on my deserted
death-bed, and my chamber decorated like a charnel house? Horrible
as the sensation of death is, as his iron gropings are stealing round
my heart, there is yet to me a sight more hideous, and which I thank
God I shall be spared witnessing—when the dead shall bury the
dead!’
 “Mrs Mucklewham broke frae my weak hand—wrenched open his
locked teeth, and emptied the hale contents down his throat—grunds
an’ a’—o’ his ‘quatenin’ draught;’ I felt myself a’ ug, as I saw his teeth
gnash thegither, an’ his lips close in quateness for ever.
“I gaed out wi’ the mortclaith; I saw the gathering; I was present
when the bread an’ dram service were waiting for the grace:—‘Try
ye’t, John,’ quo’ ane. ‘Begin yersel; ye’re dead sweer,’ quo’ anither;
when I heard ane break down an’ auld prayer into twa blessin’s.
Some were crackin’ about the rise o’ oats; some about the fa’ o’ hay.
His bit callans were there in rowth o’ claith; auld elbows of coats mak
gude breekknees for bairns. I saw the coffin carried out to the hearse
without ane admiring its bonnie gilding—quite sair and melancholy
to see! I saw the bedral bodies, wi’ their light-coloured gravats, an’
rusty black cowls, stuffing their wide pouches—maist pitifu’, I
thought, to behold. Then I saw the house-servants, wha had drunk
deepest o’ the cup o’ woe; till sae mista’en were their notions o’
sorrow, that they were just by the conception o’ the mind o’ man.
Then there was sic a clanjamphry o’ beggars; some praising the laird
for virtues that they wha kenned him kent they were failings in him;
an’ ithers were cracking o’ familiarities wi’ him, that might hae been
painful to his nearest o’ kin to hear: there was but sma’ grief when
they first gathered; but when they learned there was nae awmous for
them, I trow ony tears that were shed at the burial were o’ their
drappin’.
“There was the witless idewit Jock Murra, mair mournfu’ to see
than a’ that was sad there; when just as the hearse began to move on,
he liltit up a rantin’ sang—
Mony an awmous I’ve got.

I lookit round me when the company began to move on frae the

house wi’ the hearse; but as I shall answer, sir, there wasna ae face
that lookit sad but might as well hae smiled; the vera look o’t, in a
Christian land, broucht the saut tears gushing frae my ain auld dry
withered ee!
“In compliance with the friends’ request, as it was a lang road to
come back, his will had been read afore the interment; when sae
muckle was left to ae hospit an’ sae muckle to anither, as if the only
gude he had ever done was reserved for the day o’ his burial; or like
ane wha delays his letter till after the mail shuts, and then pays thrice
the sum to overtake the coach. It was the certainty o’ thae things that
made it the maist mournfu’ plantin’ I e’er made; an’ I threw the yird
on him, as he was let down by stranger hands (for the friends
excused themselves frae gaun ony farther, after they had heard his
will), and happit him up, wi’ a heavier heart than on the morning
when I took my ain wifie frae my side, an’ laid her in the clay.—You’ll
excuse me, sir; here’s ‘success to trade!’”—“The Auld Kirk Yard.”
 THE FAIRY BRIDE:
A TRADITIONARY TALE.

A short time before the rising of the Presbyterians, which

terminated in the rout at Pentland, a young gentleman of the name
of Elliot had been called by business to Edinburgh. On his way
homeward, he resolved to pay a visit to an old friend named Scott,
whose residence was either upon the banks of the Tweed or some of
its larger tributaries,—for on this point the tradition is not very
distinct. Elliot stopped at a small house of entertainment not far
from Scott’s mansion, in order to give his parting directions to a
servant he was despatching home with some commissions.
The signs of the times had not altogether escaped the notice of our
hero. The people were quiet, but reserved, and their looks expressed
anything but satisfaction. In Edinburgh there were musterings and
inspections of troops, and expresses to and from London were hourly
departing and arriving. As Elliot travelled along, he had more than
once encountered small parties of military reconnoitring the country,
or hastening to some post which had been assigned them. Fewer
labourers were to be seen in the fields than was usual at the season.
The cottars lounged before their doors, and gazed after the passing
warriors with an air of sullen apathy. There was no violence or
disturbance on the part of the people,—there had as yet been no
arrestments,—but it was evident to the most careless that hostile
suspicion was rapidly taking the place of that inactive dislike which
had previously existed between the governors and the governed.
It was natural that in such a condition of the national temper,
affairs of state should form the chief subject of gossip around the
fireside of a country inn. Elliot was not surprised, therefore, while
sitting at the long deal table, giving directions to his servant, to hear
the name of his friend frequent in the mouths of the peasantry. It
was a matter of course that at such a period the motions and
inclinations of a wealthy and active landholder of old family should
be jealously watched. But it struck him that Scott’s name was always
uttered in a low, hesitating tone, as if the speakers were labouring
under a high degree of awe. He continued, therefore, some time after
he had dismissed his attendant, sitting as if lost in thought, but
anxiously listening to the desultory conversation dropping around
him, like the few shots of a distant skirmish. The allusions of the
peasants were chiefly directed to his friend’s wife. She was beautiful
and kind, but there was an unearthly light in her dark eye. Then
there was a dark allusion to a marriage on the hillside,—far from
human habitation,—to the terror of the clergyman who officiated, at
meeting so lovely a creature in so lonely a place. The Episcopalian
predilections of the family of Scott were not passed unnoticed. And it
seemed universally admitted that the house had been given over to
the glamour and fascination of some unearthly being. The power of a
leader so connected, in the impending strife, was the subject of dark
forebodings.
Rather amused to find his old crony become a person of such
consequence, Elliot discharged his reckoning, mounted his steed,
and on reaching Scott’s residence, was warmly and cheerfully
welcomed. He was immediately introduced to the lady, whom he
regarded with a degree of attention which he would have been
ashamed to confess to himself was in some degree owing to the
conversation he had lately overheard. She was a figure of a fairy size,
delicately proportioned, with not one feature or point of her form to
which objection could be urged. Her rich brown hair clustered down
her neck, and lay in massive curls upon her bosom. Her complexion
was delicate in the extreme, and the rich blood mantled in her face at
every word. Her eyes were a rich brownish hazel, and emitted an
almost preternatural light, but there was nothing ungentle in their
expression. The honeymoon had not elapsed, and she stood before
the admiring traveller in all the beauty of a bride—the most beautiful
state of woman’s existence, when, to the unfolding delicate beauty of
girlhood is superadded the flush of a fuller consciousness of
existence, the warmth of affection which dare now utter itself
unchecked, the first half-serious, half-playful assumption of
matronly dignity. After a brief interchange of compliment with her
guest, she left the apartment, either because “the house affairs did
call her thence,” or because she wished to leave the friends to the
indulgence of an unrestrained confidential conversation.
“A perfect fairy queen,” said Elliot, as the door closed behind her.
“So you have already heard that silly story?” answered his host.
“Well! I have no right to complain, for I have only myself to thank for
it.”
Elliot requested that he would explain his meaning, and he in
compliance narrated his “whole course of wooing.”
“I was detained abroad, as you well know, for some years after his
Majesty’s restoration, partly on account of the dilapidated state of my
fortunes, and partly because I wished to prosecute the career of arms
I had commenced. It is now about nine months since I returned to
my native country. It was a gloomy day as I approached home. You
remember the footpath which strikes across the hill behind the
house, from the bed of the stream which mingles, about a mile below
us, with that on whose banks we now are. Where it separates from
the public road, I gave my horse to the servant, intending to pursue
the by-path alone, resolved that no one should watch my emotions
when I again beheld the home of my fathers. I was looking after the
lad, when I heard the tread of horses close behind me. On turning, I
saw a tall, elderly gentleman, of commanding aspect, and by his side
a young lady upon a slender milk-white palfrey. I need not describe
her; you have seen her to-day. I was struck with the delicacy of her
features, the sweet smile upon her lips, and the living fire that
sparkled from her eyes. I gazed after her until a turning of the road
concealed her from my view.
“It was in vain that I inquired among my relations and
acquaintances. No person was known in the neighbourhood such as I
described her. The impression she left upon me, vivid though it was
at the moment, had died away, when one day, as I was walking near
the turn of the road where I had lost her, she again rode past me with
the same companion. The sweet smile, the glance of the eye, were
heightened this time by a blush of recognition. The pair were soon
lost to me round the elbow of the road. I hurried on, but they had
disappeared. The straggling trees which obscured the view, ceased at
a bridge which stood a couple of gun-shots before me. Ere I could
reach it, I caught a glimpse of the companions. They were at the edge
of the stream, a little way above the bridge—their horses were
drinking. I pressed onward, but before I had cleared the intervening
trees and reached the bridge, they had once more disappeared. There
was a small break in the water immediately beneath the place where
they had stood. For a moment, I thought that I must have mistaken
its whiteness for the white palfrey, but the glance I had got of them
was too clear to have been an illusion. Yet no road led in that
direction. I examined the banks on both sides of the river, but that on
which I saw them was too hard to receive a hoof-print, and the
opposite bank was loose shingle, which refused to retain it when
made. The exceeding beauty of the maiden, the mysterious nature of
her disappearance, the irritable humour into which I had worked
myself by conjectures and an unavailing search, riveted her
impression upon my memory. I traversed the country telling my
story, and making incessant inquiry. In vain! No one knew of such a
person. The peasants began to look strangely on me, and whisper in
each other’s ears, that I had been deluded by some Nixy. And many
were the old prophecies regarding my family remembered—or
manufactured—for the occasion.
“Five months passed away in vain pursuit. My pertinacity was
beginning to relax, when one evening, returning from a visit to our
friend Whitelee, I heard a clashing of swords on the road before me.
Two fellows ran off as I rode hastily up, leaving a gentleman, who
had vigorously defended himself against their joint assault. ‘Are you
hurt, sir?’ was my first inquiry. ‘I fear I am,’ replied the stranger,
whom I immediately recognised as the companion of the mysterious
beauty. ‘Can I assist you?’ He looked earnestly at me, and with an
expression of hesitation on his countenance. ‘Henry Scott, you are a
man of honour.’ He paused, but immediately resumed, ‘I have no
choice, and I dare trust a soldier. Lend me your arm, sir. My dwelling
is not far from here.’ I accompanied him, he leaning heavily upon
me, for the exertion of the combat had shaken his frame, and the loss
of blood weakened him. We followed the direction he indicated for
nearly half an hour round the trackless base of a hill, until we came
in sight of one of those old gray towers which stud our ravines.
‘There,’ said my companion, pointing to the ruin. I recognised it
immediately; it stood not far distant from the place where he and his
fair fellow-traveller had disappeared, and had often been examined
by me, but always in vain.
 “Turning an angle of the building, we approached a heap of debris,
which in one part encumbered its base. Putting aside some tangled
briers which clustered around, he showed me a narrow entry
between the ruins and the wall. Passing up to this, he stopped before
a door, and gave three gentle knocks; it opened, and we were
admitted into a rude, narrow vault. It was tenanted, as I had
anticipated, by his fair companion. As soon as her alarm at seeing
her father return exhausted, bleeding, and in company with a
stranger, was stilled, and the old man’s wound dressed, he turned to
explain to me the circumstances in which I found him. His story was
brief. He was of good family; had killed a cadet of a noble house, and
was obliged to save himself from its resentment by hiding in ruins
and holes of the earth. In all his wanderings his gentle daughter had
never quitted his side.
“I need not weary you with the further details of our growing
acquaintance. It is the common story of a young man and a young
woman thrown frequently into each other’s company in a lonely
place. But, oh! tame though it may appear to others, the mere
memory of the three months of my life which followed is ecstasy! I
saw her daily—in that unfrequented spot there was small danger of
intrusion, and she dared range the hillside freely. We walked, and
sat, and talked together in the birchen wood beneath the tower, and
we felt our love unfold itself as their leaves spread out to the
advancing summer. There was no check in the tranquil progress of
our affections—no jealousies, for there was none to be jealous of.
Unmarked, it overpowered us both. It swelled upon us, like the tide
of a breathless summer day, purely and noiselessly.
“A few weeks ago her father took me aside, and prefacing that he
had marked with pleasure our growing attachment, asked me if I had
sufficient confidence in my own constancy to pledge myself to be for
life an affectionate and watchful guardian of his child? He went on to
say, that means of escaping from the country had been provided, and
offers of promotion in the Spanish service made to him. Your own
heart will suggest my answer; and I left him, charged to return after
nightfall with a clergyman. Our good curate is too much attached to
the family to refuse me anything. To him I revealed my story. At
midnight he united me to Ellen, and scarcely was the ceremony over,
when Sir James tore himself away, leaving his weeping child almost
insensible in my arms.
“Two gentlemen, who accompanied Sir James to the coast, were
witnesses of the marriage. It was therefore unnecessary to let any of
the household into the secret. You may guess their astonishment,
therefore, when, having seen the curate and me ride up the solitary
glen alone under cloud of night, they saw us return in the course of a
few hours with a lady, who was introduced to them as their mistress.
Great has been their questioning, and great has been the delight of
our jolly priest to mystify them with dark hints of ruined towers,
hillsides opening, and such like. The story of the Nixy has been
revived, too, and Ellen is looked on by many with a superstitious
awe. I rather enjoyed the joke at first, but now begin to fear, from the
deep root the folly seems to have taken, that it may one day bear evil
fruits for my delicate girl.”
His augury of evil was well-founded, but the blight fell upon his
own heart. As soon as he heard of the rising in the west, he joined the
royal forces at the head of his tenantry. During his absence, and
while the storm of civil war was raging over the land, his cherished
one was seized with the pangs of premature labour. She lay in the
same grave with her child, before her husband could reach his home.
The remembrance of what she had undergone, her loneliness amid
the tempests of winter, her isolation from all friends, had so shaken
her frame that the first attack of illness snapped the thread of life.
Her sufferings were comparatively short. But the widower! He
sought to efface the remembrance of his loss in active service.
Wherever insubordination showed itself, he prayed for employment.
The Presbyterians learned at last to consider him as the embodied
personification of persecution. The story of his mysterious marriage
got wind. He was regarded as one allied to, and acting under, the
influence of unholy powers. He knew it, and, in the bitterness of his
heart, he rejoiced to be marked out by their fear and terror, as one
who had nothing in common with them. His own misery, and this
outcast feeling, made him aspire to be ranked in their minds as a
destroying spirit. The young, gallant, and kind-hearted soldier
became the most relentless persecutor of the followers of the
Covenant. Even yet does his memory, and that of his Fairy Bride, live
in popular tradition like a thunderstorm, gloomy and desolating, yet
not without lambent flashes of more than earthly beauty.—
Edinburgh Literary Journal.
 THE LOST LITTLE ONES.

Chapter I.
I have a story to tell relative to what happened to Sir George and
Lady Beaumont, the excellent and beloved proprietors of the
Hermitage, in a neighbouring county. At the period of which I speak,
their family consisted of five children, three sons and two daughters;
and their eldest, a daughter called Charlotte, was then nine years of
age. She was a remarkably clever child, and a great favourite of her
parents; but her mother used to remark that her vivacity required
checking, and, notwithstanding her partiality for her, she never failed
to exercise it when it became necessary. It would have been well had
others acted equally judiciously.
It happened one day, as the family were going to sit down to
dinner, that Charlotte did not make her appearance. The maid was
sent up to her room, but she was not there. The dinner-bell was
ordered to be rung again, and a servant was at the same time
dispatched to the garden; and this having been done, Sir George and
his lady proceeded with the other youngsters to the dining-room, not
doubting but Charlotte would be home immediately. The soup,
however, was finished without any tidings of her, when, Lady
Beaumont seeming a little uneasy, Sir George assured her there was
no cause for alarm, as Charlotte would probably be found under her
favourite gooseberry bush. Lady Beaumont seemed to acquiesce in
this, and appeared tolerably composed, till the servant who had been
sent to the garden came back to say that she was not there. Sir
George insisted that the man had probably passed her without seeing
her, the garden being so large; but the servant averred that he had
been through the whole of it, and had shouted repeatedly Miss
Charlotte’s name.
“Oh!” exclaimed Sir George, “she has pretended not to hear you,
Robert, and, I daresay, will be back immediately, now that she has
succeeded in giving you a race round the garden; however,” added
he, “you may go back again, and take Samuel and Thomas with you,
and if you do not find her hiding herself in the garden, you may take
a peep into the shrubbery, as she may slip in there, on seeing you
returning; and as you go along, you may call to her, and say that
dinner waits, and that Lady Beaumont is much displeased with her
being out at this time of the day. And now, my love,” continued Sir
George to his lady, “just let us proceed with dinner, and compose
yourself.”
Lady Beaumont forced a smile, and busied herself in attending to
her young ones; but her own plate was neglected, and her eyes were
continually turned towards the window which looked upon the lawn.
“What can keep Robert, papa?” said Charles to his father.
“Indeed, my boy,” said Sir George, “I do not know. Charlotte,”
continued he to Lady Beaumont, “do you see any thing?”
“They are all coming back,” exclaimed Lady Beaumont, “and
alone!” and she rose hastily from her chair.
Robert and the other men now entered, and reported that they had
searched every spot in the garden and the shrubbery, but without
finding any trace of her; and the people who had been working there
all day had seen nothing of her. Lady Beaumont now became
excessively alarmed, and Sir George himself was far from easy,
though he appeared before his lady to treat the matter lightly.
“She’ll have gone up to the cottages to see her god-brother,” said
Sir George; “or perhaps have wandered over to the mill.”
“And if she has fallen into the stream!” ejaculated Lady Beaumont.
“Now, dear Charlotte, do not needlessly alarm yourself; there’s no
fear but we shall soon find her.”
“God grant it!” said Lady Beaumont, “but my mind misgives me
sadly.”
Messengers were now dispatched to the cottages, and to the mill,
and in various other directions around the Hermitage, but all came
back without having obtained any tidings of the missing child. Sir
George, now very seriously alarmed, gave private directions for
having the fish-pond, and the stream which ran at the bottom of the
garden, carefully dragged. It was done, but nothing was found. The
whole household was now in motion, and as the story spread, the
tenants and neighbours came pouring from all quarters, with offers
to search the country round in every direction; so much was Sir
George esteemed and beloved by all classes. Their offers were
thankfully accepted, and after choosing their ground, and dividing
themselves into different parties, they set out from the Hermitage,
resolved, as they said, to find the little one, if she was above ground.
Sir George and his lady went out as the parties set off in their
different directions, and continued walking up and down the avenue,
that they might the sooner perceive the approach of those bringing
intelligence; but hour after hour elapsed, and no one came. Sir
George then proposed that Lady Beaumont should go home and see
the young ones put to bed. She did so, but soon returned again.
“I know,” said she, answering Sir George’s look, “that you wished
me to remain at home and rest myself; but what rest can there be for
me, till we have some intelligence of”——and her voice faltered.
“Well, well, then,” said Sir George, pressing her arm in his, “let us
take a few more turns—surely we must hear something soon.”
The people now began to come dropping in from different
quarters, but all had the same melancholy answer—no one had seen
or heard of her. The hearts of the poor parents were sadly depressed,
for daylight was fast closing in, and almost all those who had set off
on the search had now returned, and amongst them their faithful
servant Robert, principally from anxiety to learn if any intelligence
had been obtained of his favourite. But when he found that all had
returned unsuccessful, he declared his determination to continue the
search during the night; and he, and a good many others who joined
him, set off soon afterwards, being supplied with torches and
lanterns of various descriptions.
This determination gave new hopes to the inmates of the
Hermitage, and Lady Beaumont endeavoured to rally her spirits; but
when at length, as daylight broke, Robert and his party returned
alone, and without intelligence, nature exhausted gave way, and she
fell senseless in her husband’s arms.
 In the morning Robert tapped at Sir George’s door, and
communicated quietly to him his recollecting to have seen a rather
suspicious-looking woman near the Hermitage the previous day, and
that he had just heard from a neighbour, that a woman of that
description, with a child in her arms, had been seen passing to the
eastward. Orders were immediately given for a pursuit on horseback;
—Sir George giving directions to bring in every one whom they
suspected; saying, that he would compensate those who had reason
to complain of being used in this way. But, though many were
brought to the Hermitage, and large rewards were offered, yet week
after week passed over without bringing them the smallest
intelligence of their lost little one.

Some months had elapsed since their child had disappeared, and
the minds of the parents had become comparatively composed, when
their attention was one evening attracted by the appearance of an
unusual number of people in the grounds below the terrace, and
whose motions it seemed difficult to understand.
“What can have brought so many people there?” asked Lady
Beaumont; “and what are they doing?”
“Indeed, my love, I do not know,” said Sir George, “but there’s
Robert, passing down the walk, and he will tell us;” and he called to
Robert, who, however, seemed rather not to wish to hear; but Sir
George called again, and so loudly, that Robert was obliged to stop.
“Robert,” said Sir George, “what do these people seek in the low
grounds there?”
“They are looking for —— of Widow Watt’s, your honour,” said
Robert.
“Did you hear what it was, my dear?” said Sir George to his lady.
“No,” said Lady Beaumont; “but probably her pet lamb, or more
likely her cow, has strayed.”
“Is it her cow that’s amissing, Robert?” called Sir George.
“No, your honour,” said Robert.
“Her lamb then, or some other beast?” asked Sir George.
“Naething o’ the kind, your honour,” answered Robert.
 “What then?” demanded Sir George, in a tone that showed he
would be answered.
“Why, your honour, they say that wee Leezie Watt’s no come
hame, and the folk are gaun to seek for her; and nae doubt they’ll
soon find her,” added Robert, stepping hastily away to join them.
Sir George had felt Lady Beaumont’s convulsive grasp of his arm,
and gently led her to a seat, where after a while she became more
composed, and was able to walk to the Hermitage.
“And now,” said she, on reaching the door, “think no more of me,
but give all your thoughts to the most likely means of restoring the
poor child to its widowed parent.”
“Spoken like yourself,” said Sir George, pressing her hand; and
immediately flew to give directions for making the most thorough
and effectual search. But this search, alas! proved equally unavailing
as the former one, and no trace whatever could be found of the
widow’s child.
The story, joined to the disappearance of Sir George’s daughter,
made a great noise, and created considerable alarm in that part of
the country; and this alarm was increased fourfold, when, in three
weeks afterwards, another child was lost. The whole population now
turned out, and people were stationed to watch in different places by
night and by day. But no discovery was made; and, to add to their
horror, child after child disappeared, till the number of the lost little
ones amounted to seven. Parents no longer durst trust their children
for a moment out of their sight. They went with them to school, and
also went to bring them back again; and these precautions had the
best effect, many weeks having elapsed without anything unpleasant
happening. The neighbours now began to congratulate each other on
the probability, or rather certainty, that those who had inflicted so
much misery in that quarter of the country had gone somewhere else,
and that they would now be able to live in some kind of peace and
comfort. But this peaceful state was not destined to continue.
One of Sir George’s best tenants, David Williams, had been busily
engaged in ploughing the whole day, and was thinking of unyoking
and going home, when his wife looked over the dyke, and asked him
how he was coming on. “But whaur,” continued she, “are the bairns?
are they at the t’ither end o’ the field?”
 “The bairns!” said David, “I haena seen them; but is’t time for their
being back frae the school?”
“Time!” exclaimed his wife; “muckle mair than time, they should
hae been hame an hour syne; and that brought me out to see gif they
were wi’ you, as you said ye wad may be lowse and gang to meet
them!”
“’Od, I was unco keen,” said David, “to finish this bit lea, and had
nae notion it was sae far in the day.”
“Preserve us!” exclaimed Matty, “gif anything has happened to
them!”
“Nonsense,” cried David, “when there’s three o’ them thegither;
but, here,” says he, “tak ye the beasts hame, and I’se be off, and will
soon be back wi’ them; sae dinna vex yoursel.”
“I hope it may be sae,” said Matty, “but my heart misgies me sair—
however, dinna wait to speak about it.”
David Williams was not long of reaching the school, where he
learned from the mistress, that his children had remained a good
while after the rest, expecting him to come for them; but that they
had at length set out to meet him, as she understood, and that they
had been gone above an hour, and she thought they would have been
home long ago. “But, perhaps,” continued she, “they may have called
in at their aunt’s, for I heard them speaking of her to-day.”
David took a hasty leave, and posted away to his sister’s, but the
children had not been there, nor had any one seen them. His
brother-in-law, John Maxwell, seeing his distress, proposed taking
one road, while David took the other, towards home, and to meet at
the corner of the planting near his house. They did so, and arrived
nearly at the same time, and each without having heard or seen
anything of the children. David Williams was now in a perfect agony,
and the perspiration ran like water from his forehead.
“Maybe they’re hame already,” said his brother-in-law; “I daurna
gang up mysel to speir, bit we’ll send yon herd laddie.”
John went, and gave the boy his directions to ask, first, if David
Williams was at hame, and then to ask, cannie-like, if the weans were
in. He then sat down beside David, keeping his eye on the cottage,
when he sees Matty come fleeing out like one distracted.
 “Down, David! down wi’ your head, man,” cried John, “that she
mayna see us.” But Matty had got a glimpse of them, and came right
down on them as fast as she could run.
“Whaur’s my bairns, David?” cried she; “whaur’s our bonnie
bairns? I kent weel, whenever the callant askit if they were come
hame, what was the meaning o’t. They’re lost, they’re lost!”
continued the poor woman, wringing her hands, “and what’ll become
o’ me?”
“Now Matty, Matty, my ain wife,” said David, “dinna ye gang on at
that gate, and hurt yoursel; naebody but John and me has been
looking for them, and we’ve come straught hame, and there’s a heap
o’ ither ways, ye ken, that they may hae gane by.”
“Ay, ower mony—ower mony ways, I’m doubtin’,” said Matty
mournfully, shaking her head; “but dinna let us put aff time this gate.
Rin ye baith an’ alarm the neebours, and I’ll awa to the Hermitage,
where we’re sure to get help; and God grant it mayna end wi’ mine as
it did wi’ ithers!”
 Chapter II.
“By heavens!” exclaimed Sir George, while the blood mounted to
his forehead, “but this is infamous. Ring the alarm bell,” continued
he, “and let all my tenants and domestics turn out on foot or on
horseback, and form as large a circle round the place as possible; and
let them bring out all their dogs, in case this horrid business is
caused by some wild animal or another which may have broken from
its keeper; and Robert,” continued Sir George, “see that no strangers
are allowed to pass the circle, on any pretence whatever, without my
having seen and examined them.”
These orders were immediately obeyed, and the alarm having
spread far and near, an immense body of people quickly assembled,
and commenced a most determined and active search, gradually
narrowing their circle as they advanced.
Lady Beaumont, ascending to the top of the Hermitage, which
commanded a view of the whole surrounding country, watched their
proceedings with the most intense interest; trusting that the result
would be not only the restoration of David Williams’ children, but
the discovery also of the others which had disappeared, and of her
own little one amongst the number. At times, single horsemen would
dash from the circle at a gallop, and presently return with some man
or woman for Sir George’s examination; and while that lasted, Lady
Beaumont’s heart beat fast and thick; but the dismissal of the people,
and the re-commencement of the search, painfully convinced her
that no discovery had yet been made; and sighing deeply, she again
turned her eyes on the searchers. At other times, the furious barking
of the dogs, and the running of the people on foot towards the spot,
seemed to promise some discovery; but the bursting out from the
plantation of some unfortunate calf or sheep, showed that the people
had been merely hastening to protect them from the unruly animals
which had been brought together, and who, having straggled away
from their masters, were under no control.
The day was now fast closing in, and the circle had become greatly
diminished in extent; and when, in a short time afterwards, it had
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