The Plug
The plug in most pro-forma financial models, is usually one of the following items:
- cash and marketable securities (ensuring no negative balances),
- debt, or
- treasury stock, depending on how the firm finances itself.
After some further analysis, we use the ‘Cash / Sales’, and ‘Debt / Total asset’ ratios below. This leaves Treasury Stock (one component of Stockholder’s Equity) as the plug in the pro-forma model – meaning that new equity is either issued or re-purchased, in order to balance the accounts.
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Note:
Another type of plug may be to assume a fixed debt repayment schedule, with no dividend payments made until all relevant debt has been paid off. If you do this, the final Pro-Forma model would need to be ammended accordingly (see the ‘Final Valuation’ link, later on in this guide).
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