Interviewer:  So, here we are in the third interview exploring a structure to transform an answered investment opportunity into affirming fully complemented Financial Statements.

Author:  Affirming fully complemented Financial Statements are created from an answered investment opportunity through the Systematic External Financing Extinguishment (SEFE) structure. SEFE is centered on displaying the financing scenario imbedded in an answered Solve/Assumption Synchronicity (SAS) investment decision. SEFE is the engine driving the creation of the fully complementing affirming Financial Statements. Let’s start by showing a SEFE example. Schedule 3 is a set of fully complementing affirming Financial Statements. Schedule 3’s assumptions are a continuation from earlier interviews to aide in familiarity.

Interviewer:  Ok. Let me look at Schedule 3.

Author:  The first page contains the four basic Financial Statements. You can see on Lines [27] through [29] the calculation affirming the 30% Internal Equity Return.

Interviewer:  Yes, I see it. Am I one of the first persons ever to witness an investment opportunity’s equity return being proven-out?

Author:  Yes, you are. Do you see all the referenced detail flowing into the Owner’s Equity Statement from the other Financial Statements?

Interviewer:  Yes, I see the referenced detail flowing into the Owner’s Equity Statement. Is SEFE where all this Financial Statement stuff starts?

Author  Yes, SEFE is the cornerstone of affirming Financial Statements. SEFE’s four interrelated sections are shown in Schedule 3, Lines [31] through [52].

Interviewer  Holy mackerel! That’s a lot going on.

Author:  The first step is the initial Equity and Debt, which comes from Initial Cost, Line [34]. The second step is calculating a weighted average external Capital Cost. Equity and Debt are weighted and combined to a 10% Capital Cost on Line [52]. The next step is calculating the combined Equity and Debt Return “On” and “Of”, Line [39]. Subtracting Return “On” from Return “On” and “Of” leaves Return “Of”, Line [40]. Line [32] uses Line [40] to extinguish Equity and Debt. Sale ending book value, Line [33] would have been zero if the asset had a five-period life instead of an eleven-period life.

Interviewer  Oh, no. Here comes another headache.

Author  Interest expense, Line [45] uses the Debt Weight and Debt Rate from the Capital Cost calculation.

Interviewer:  How would I know all this is correct?

Author:  The ending Equity, Line [26] is zero in the last period, the Internal Equity Return, Line [29] matches the 30% assumption, Line [82] and the Ending Trial Balance shows the final dividend brings the Secondary Flow balance to zero, Line [71]. All three, the ending Equity at zero, the replicated Internal Equity Return and Secondary Flow at zero are achieved without the introduction of any additional assumptions. The only assumptions used in the Financial Statements are the original investment opportunity assumptions.

Interviewer  This all seems too clear cut, too neat, too perfect. What’s the catch? I liked IRR and NPV. They had a great amount of gray area to work with. No one could say anything definitive or totally conclusive about them.

Author  Sorry. Yes, SEFE’s structure is definitive and persuasive.

Interviewer  I think I’ll eventually understand all this stuff. It’s just a lot at once.

Author  I agree. There’s another point I would like to discuss.

Interviewer  Really?

Author:  An investment opportunity poses two decisions. There is an initial investment decision and a subsequent financing decision. The new methodology sets a clear demarcation between the investment decision and financing decision.

Interviewer:  Please stop with this investment versus financing decision stuff. It’s too theoretical. I’m interested in what I’m going to do with all this.

Author  With all what?

Interviewer:  With replacing IRR and NPV with your stuff. What’s all this get me?

Author  Ok. This is what will happen. After answering an investment opportunity with SAS, if reality matches your investment assumptions, your investment opportunity’s Financial Statements become straight-up actual Financial Statements. That’s a good thing. However, more probable, when reality differs from your assumptions, Financial Statement differences build cause-and-effect variance explanations. Analyzing cause-and-effect variance explanations expedite ways to maximize an organization’s wealth formation through better future investment decisions.

Interviewer  Sure, I can see that, better investment decisions. I like maximizing wealth.

Author  I thought you would. Here’s a thought. You could use the methodology to break-down an organization’s Financial Statements into a series of asked and answered investment opportunities and then roll them forward to peer into the future.

Interviewer:  Wait. Whoa, that’s way too much work to even think about right now. Let’s walk before we run here.

Author  Ok. Let’s take a break and then start the fourth interview where we’ll explore how to answer investment opportunities to conform to the SAS benchmark and prove-out Internal Equity Return.