In step two, we forecast key balance sheet operating items.

We don't need to do a full balance sheet.

We only need to forecast items that affect the cash available for debt repayments.

So ultimately, items that affect the income statements and the cash flow statements.

In this model, there's only one balance sheet item that we need to forecast, and that's the debt financing fees.

That's going to affect our income statements via the amortization amount, which will then affect tax expense, which will then affect the cash available to repay debt.

So I'll start with the ending balance at the deal date in column E, if I press equals, I then need to go up to the sources and uses of funds, and there's our debt financing fee figure of 7.4.

That becomes our beginning balance next period.

But I'm allowed to spread that fee over the time period of the debt.

So if we have the debt for five years, we can spread that fee over five income statements.

To do that, I'll take that 7.4 and I'll log onto that.

I then need to divide it by the number of years.

So again, I'll scroll up to the top, find that year assumption, five years lock onto it, and I'll want it to be a negative. So I'll multiply by minus one. Great.

I get a figure of 1.5 negative. My ending balance.

I'll sum the items above, so that 1.5, we'll go in the income statement in just a minute.

The only slight problem we've got is that if I copy that to the right for 10 years, initially the 1.5 amortization is working correctly.

But when the ending balance gets to zero, we then find the amortization continues and the ending balance goes below zero, which is nonsensical.

So what we need to do is we need to stop that amortization happening after five years.

To do that, I'm going to put a min function at the beginning of our formula.

So it's now saying we want the min of 1.5 comma or the beginning balance.

What this says is when the beginning balance gets below the 1.5, it will choose the beginning balance.

So if I press enter and copy that all the way to the right, we can see in years 1, 2, 3, 4, and five, it's amortizing correctly.

But then once we go to year six, the beginning balance is zero.

It chooses that beginning balance and then stays at zero.

So that's working great. Now that amortization amount needs to go down to the income statement, so it's scroll down a little bit.

Amortization of debt issuance fees, press equals, And there's that 1.5.

Great. I could then copy that to the right.

Any other balance sheet items that need forecasting would be done.

Now if I go down to our cashflow statements, I can see those kind of items are here, but we've already hard coded them into the cashflow statements.

These have perhaps been provided by management of the company we're acquiring, but if they weren't provided, I would have to forecast them as balance sheet items and then find the cash impact here.