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Spreadsheet modeling in corporate finance
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change finance education from being calculator based to being spreadsheet modeling based. This change will better prepare students for the 21st century business world. This change will increase student satisfaction in the classroom by allowing more practical, realworld applications and by enabling a more handson, active learning approach.
Teach By Example. I believe that the best way to learn spreadsheet modeling is by working through examples and completing a lot of problems. This book fully develops this handson, active learning approach. Active learning is a wellestablished way to increase student learning and student satisfaction with the course / instructor. When students build financial models themselves, they really "get it." As I tell my students, "If you build it, you will learn." Supplement For All Popular Corporate Finance Textbooks. This book is a supplement to be combined with a primary textbook. This means that you can keep using whatever textbook you like best. You don't have to switch. It also means that you can take an incremental approach to incorporating spreadsheet modeling. You can start modestly and build up from there. Alternative notation versions are available that match the notation of all popular corporate finance textbooks. Plain Vanilla Excel. Other books on the market emphasize teaching students programming using Visual Basic for Applications (VBA) or using macros. By contrast, this book does everything in plain vanilla Excel. Although programming is liked by a minority of students, it is seriously disliked by the majority. Plain vanilla Excel has the advantage of being a very intuitive, userfriendly environment that is accessible to all. It is fully capable of handling a wide range of applications, including quite sophisticated ones. Further, your students already know the basics of Excel and nothing more is assumed. Students are assumed to be able to enter formulas in a cell and to copy formulas from one cell to another. All other features of Excel (graphing, builtin functions, Solver, etc.) are explained as they are used. Build From Simple Examples To Practical, RealWorld Applications. The general approach is to start with a simple example and build up to a practical, realworld application. In many chapters, the previous spreadsheet model is carried forward to the next more complex model. For example, the chapter on binomial option pricing carries forward spreadsheet models as follows: (a.) singleperiod model with replicating portfolio, (b.) eightperiod model with replicating portfolio, (c.) eightperiod model with riskneutral probabilities, (d.) fullscale, fiftyperiod model with volatilities estimated from real returns data. Whenever possible, this book builds up to fullscale, practical applications using real data. Students are excited to learn practical applications that they can actually use in their future jobs. Employers are excited to hire students with spreadsheet modeling skills, who can be more productive faster. A Change In Content Too. Spreadsheet modeling is not merely a new medium, but an opportunity to cover some unique content items which require computer support to be feasible. For example, the fullscale, real data spreadsheet model in Corporate Financial Planning uses three years of historical l OK data on Nike, Inc. (including every line of their income statement, balance sheet, and cash flow statement), constructs a complete financial system (including linked financial ratios), and projects these financial statements three years into the future. The spreadsheet model in LifeCycle Financial Planning includes a detailed treatment of federal and state tax schedules, social Security taxes and benefits, etc., which permit the realistic exploration savings, retirement, and investments choices over a lifetime. The spreadsheet model in US Yield Curve Dynamics shows you 30 years of monthly US yield curve history in just a few minutes. The spreadsheet model in Three Valuation Techniques demonstrates the equivalence of the Adjusted Present Value, Flows To Equity, and the Weighte9Average Cost of Capital methods, not just in the perpetuity case covered by most textbooks, but for a fully general twostage project with an arbitrary set of cash flows over an explicit forecast horizon, followed by a infinite horizon perpetuity. As a practical matter, all of these sophisticated applications require spreadsheet modeling.
Time Goes Across The Columns And Variables Go Down The Rows. When something happens over time, I let each column represent a period of time. For example in capital budgeting, year 0 is in column B, year 1 is in column C, year 2 is in column D, etc. Each row represents a different variable, which is usually a labeled in column A. This manner of organizing spreadsheets is so common because it is how financial statements are organized. Color Coding. A standard color scheme is used to clarify the structure of the spreadsheet models. The printed book uses: (1) light gray shading for input values, (2) no shading (i.e. white) for throughput formulas, and (3) dark gray shading for final results ("the bottom line"). The accompanying electronic version of the book (a PDF file) uses: (1) yellow shading for input values, (2) no shading (i.e. white) for throughput formulas, and (3 green shading for final results ("the bottom line"). A few spreadsheets include choice variables. Choice variables use medium gray shading in the printed book and blue shading in the electronic version. The Time Line Technique. The most natural technique for discounting cash flows in a spreadsheet model is the time line technique, where each column corresponds to a period of time. The time line technique handles the general case of the discount rate changing over time just as easily as the special case of a constant discount rate. Typically one does have some information about the time pattern of the riskfree rate from the term structure of interest rates. Even just adding a constant risk premium, yields a time pattern of discount rates. There is no reason to throw this information away, when it is just as easy to incorporate it into a spreadsheet. I use the time line technique and the general case of changing discount rates throughout the capital budgeting spreadsheet models. Explicit Inflation Rate. A standard error in capital budgeting is to treat the cash flow projections and discount rate determination as if they came from separate planets with no relationship to each other. If the implicit inflation rate in the cash flow projection differs from the implicit inflation rate in the discount rate, then the analysis is inconsistent. The simple fix is to explicitly forecast the inflation rate and use this forecast in both the cash flow projection and the discount rate determination. The capital budgeting spreadsheet models teach this good modeling practice. Dynamic Charts. Dynamic charts allow you to see such things as a "movie" of the Term Structure of Interest Rates moves over time or an "animated graph" of how increasing the volatility of an underlying stock increases the value of an option. Dynamic charts are a combination of an up/down arrow (a "spinner") to rapidly change an input and a chart to rapidly display the changing output. I invented dynamic charts back in 1995 and I have included many examples of this useful educational tool throughout this book.
gain a practical understanding of the core concepts of Corporate Finance, develop handson, spreadsheet modeling skills, and build an entire suite of finance applications, which you fully understand.
cholden@indiana.edu to share the good news. Please tell me your name, school, (prospective) graduation year, and which spreadsheet modeling book you completed. I will add you to a webbased honor roll at:
http://www.spreadsheetmodeling.com/honorroll.htm
We can celebrate together!
Spreadsheet Modeling by Craig W. Holden, published by Prentice Hall. The series includes:
Spreadsheet Modeling in Corporate Finance, Spreadsheet Modeling in the Fundamentals of Corporate Finance, Spreadsheet Modeling in Investments, and Spreadsheet Modeling in the Fundamentals of Investments.Hi,
I just finished the book. It is worth every dollar spent on it. If you are buying, get the second edition because the first is packed with typos.
This book serves two purposes:
1. It teaches you how to use Excel
2. It is a great practical review of corporate finance
and it does a great job in both aspects
Hi, I am Craig W. Holden, author of "Spreadsheet Modeling in Corporate Finance" (the first edition). I just wanted to let you know that the FOURTH edition of this book is now available. It has been retitled as "Excel Modeling in Corporate Finance (4th Edition)" and was released Aug 12, 2011. It includes everything that was in the first edition plus a lot of additional content. All of the examples and data have been updated to the present and all known typos have been corrected. The fourth edition strictly dominates the first edition and I strongly recommend it. Click on my name at the top of the page to locate it. Thanks for your consideration.
Although intended as a supplement for textbooks used in college level business courses, this book is also valuable to working professionals who deal with financial modeling. Because I am a consultant and project manager I'm going to slant this review towards how my peers will benefit from the book. It's value outside of my narrow scope should be apparent.
First, unlike other books that teach spreadsheet modeling, the spreadsheets that come on the CD ROM are not finished products. Instead the author has chosen spreadsheets that use dynamic charts to illustrate concepts in an interactive manner (drag a control to change the parameters and the chart changes  this is a powerful teaching tool in or out of the classroom).
Second, the book needs to be read in sequence because spreadsheets you build in one chapter are the basis for refinements and added complexity in later chapters. This leads to highly complex spreadsheets, such as the model in chapter 16 (LifeCycle Financial Planning), which incorporates tax parameters (federal and state levels), benefits analysis and other factors.
In all there are 53 spreadsheets presented in this book, and you build them. The author calls this "active learning" (as opposed to passive learning where you are provided templates), and it is effective because you are the one who builds the models and tools while following the book. Note that this book does NOT purport to teach Excel programming, but how to build models using Excel's basic features and functions.
As a consultant and project manager the parts of this book that were immediately useful to me were: Parts I (Time Value of Money), III (Capital Budgeting) and IV (Financial Planning). In particular, project management requires a thorough understanding of time value of money and capital budgeting, and the chapters in these sections should be read by anyone who is assigned as a project manager. Financial planning, especially from the perspective of IT asset management, is another knowledge area in which IT consultants should be well versed.
The other parts of the book (II Valuation and V Options and Corporate Finance) will be more useful to finance professionals and general business managers. There is a collection of supporting material on the author's web site that augment this book, including spreadsheets that can be downloaded. Another plus for the working professional is the book is fastpaced and, dare I say, engrossing.
DAGMAR, Defining Advertising Goals for Measured Advertising Results 2Nd Ed. Dutka, Russell., Solomon. Colley 



