Financial Modeling Return to Book Review Page Return to Home Page

By Simon Benninga

The MIT Press, 2000

For the 99% of people in the financial analysis profession who use Excel (except for the few with PhD degrees in financial engineering, applied statistics, operations research or the like), this book is gold. For anyone who doesn’t have a complete command of the material in the book who acquires all the knowledge therein, it is almost certainly worth a percentage increase in income in the double—and quite conceivably triple—digits.

Not only is the quantitative side of financial theory explained in great detail, but everything is applied to practical Excel examples. A disk with all the necessary worksheets populated with the appropriate data accompanies the book. The melding of the quantitative content with Excel is elegantly successful. A knowledge of basic statistics is assumed (which anyone in financial analysis should already possess), access to and familiarity with Excel’s data analysis tools is necessary and some experience creating Excel VBA macros is helpful in putting the wisdom in Benninga’s production to use.

Unexpected in a basically quantitative endeavor is a great deal of detail about tax laws and accounting principles in chapters covering buy/lease decision methodology. Other topics thoroughly covered include present value theory, cost of capital, financial statement modeling, investment portfolio analysis (in great detail), option pricing models (again in great detail) and bond analysis. The only topic that comes quickly to mind that Benninga didn’t touch that would have been helpful is portfolio factor analysis.

There is precious little to criticize about the book. Benninga’s position is resolutely positive on all the topics he covers; and many academics assert that calculating the cost of capital is by its nature impossible. Also, in his treatment of bond risk analysis, most of the material is devoted to duration with only a brief explanation of the more accurate convexity measure. Finally, a more accurate title would have been Financial Engineering rather than Financial Modeling, although it could be reasonably argued that the existing title is almost certain to draw more readers.

If someone were to prepare a payback analysis of this book, the ratio would be at least in the triple digits.

IMPORTANT NOTE: This isn’t a book that you sit down and read. It is to be intensely studied. Excel should be running on your computer when the book is referenced, and the program should be used as much as the volume. Taking notes while digesting the book and the accompanying Excel lessons is extremely helpful.