Corporate and Project Finance Modeling

Chapter 38Creating a Structured Cash Flow Process in a Corporate Model to Resolve Circular References

If you thought the process of incorporating the net operating loss into an acquisition model with a cash flow sweep was not bad enough, the formulas become even more tedious and there are more complex iterative adjustments when solving the problem for a standard corporate model. Added complexities in solving circular references for a corporate model arise from differences between the interest income rate and the interest expense rate and because dividends may be deducted before computing the net cash flow. The process can also include equity issues or buybacks to meet a target capital structure. Dividends will probably have some sort of relationship with income, which in turn is driven by interest income and interest expense. The good news about this problem is that it is possible to solve the problem using an iterative user-defined function, and, after you have done it one time, you can use the same function over and over again in other models.

Structuring a Corporate Model with a Cash Flow Waterfall

Before discussing the formulas and iterative procedures for developing functions in a corporate model, a financing structure for a standard corporate model is reviewed and developed with a cash flow waterfall process. Because the interest rates for income and the interest rates for interest expense are usually assumed to be different, the surplus cash and short-term debt should ...