Dimensional analysis is fundamental to finance. It can be developed along several lines, but of greatest interest in finance is the development of a technique known as the financial statement. This technique, which varies from country to country, is a set of standardized descriptions of the revenues and expenses of a company and, particularly in the United States, a set of standardized income and expense ratio statements. Using a spreadsheet, we can produce these statements automatically. It does not involve more than 10 operations. Once we have these statements, we can use them to establish valuation ratios such as EBITDA, ROIC, ROE, ROA, debt-to-equity ratio, interest coverage, etc. This is the vast bulk of the use of a spreadsheet in finance.
Of these, interest charges are the more complex. How to assess the effect on EBIT to a change in discount rate or the risk-free rate As for many other complex numerical problems, there is no general, analytic solution. Therefore we use Monte Carlo simulation, which allows us to specify in great detail the input to a financial model. Among other things this input includes distributions of interest rates over time, or of property values, as well as distributions for the non-financial variables in the model. The results of such sensitivity analysis illustrate the importance of these variables on the results. We can typically use a spreadsheet to perform all advanced financial calculations. The code can be saved and then been executed within a financial model. I have not seen anything similar in any other book. This way a complete application to a finance problem can be developed in a spreadsheet environment, and the complete code can be transported to a financial model.
Financial modeling with Excel is much less demanding than modeling with traditional packages (such as SAS, or VBA in Excel). In return, however, Excel users find certain limitations, such as the possibility of breakdowns in calculations and the absence of the elegance of R or VBA. For a deeper understanding of Excel financial modeling, I recommend partitions of the book. Part I, which begins with the very basics and teaches the new user how to use Excel as a financial modeling tool, is by itself worth the price of the book. d2c66b5586