Interest expense

Question 1

Interest expense

Answer 1

Average debt level * % interest rate

Question 2

Interest expense - Average debt level

Answer 2

Average debt level is calculated only after cash flows are forecast during each period and determined if there is a surplus or deficit. If there is a surplus, debt is paid down and if there is a deficit more debt is raised. As a result, interest expense is highly sensitive to changes in any assumptions in the model that alter cash flows

Question 3

Interest expense - % interest rate

Answer 3

Use the last available interest rate for your forecast. The interest rate on each tranche of debt and/or weighted average interest rate is usually disclosed in the 10K debt footnote. When there are no disclosures, you can also take the last average historical interest expense / total debt ratio and use this rate going forward.

When modelling a significant change in capital structure or there is a change in the lending environment and you expect the interest rate to change use a new rate based on the company’s current yields. This approach is more involved and often requires you to estimate rates on company’s fixed rate (bonds) and variable rate (term loans and revolver) debt on a tranche by tranche basis