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• W2186450341 abstract "Pro forma forecasting and balancing an external financing need can become inconsistent because a change in debt also changes the interest expense, which creates a circular logic problem. A second issue arises in the special case of no additional external financing at the internal growth rate (IGR), which should incorporate spontaneous financing from increases in current liabilities while maintaining a constant interest expense. Solutions are offered to both problems through a direct calculation of the interest expense without the need for an iterative process and an updated formula for the IGR, thus strengthening the literature on pro forma analysis. The interest expense is a particularly difficult item to calculate correctly in estimating an external financing need as part of a pro forma analysis, especially with multiple periods. This occurs because an estimate of the interest expense is required to calculate the external financing need. Then, if a change in debt is assumed as the plug to satisfy any additional financing, the interest expense would also be expected to change proportionately with the change in debt. This seems to create a circular logic problem. A second issue occurs in the special case of no new external financing at the internal growth rate (IGR), in which the interest expense is implicitly assumed to increase with sales rather than remain constant as the level of debt remains constant. In this paper, guidance is provided for including the correct interest expense in the calculation process for both the pro forma analysis at various growth rates and for the calculation of the IGR. This paper is divided into four sections. The first section illustrates a forecasting process using the percentage of sales method and lays the foundation for a framework to deal with inconsistencies in the calculation process. The second section shows that the pro forma interest expense can be calculated directly for any growth rate, avoiding a circular reference problem and without the need for an iterative solution. The third section illustrates that the current formula for the IGR presented in many textbooks is not consistent with a pro forma analysis in which the interest expense remains constant, and therefore understates the true IGR. A corrected formula is derived that is consistent with a constant level of debt. The last section is a summary of the results." @default.
• W2186450341 created "2016-06-24" @default.
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• W2186450341 date "2012-01-01" @default.
• W2186450341 modified "2023-09-23" @default.
• W2186450341 title "Improved Pro Forma Forecasting Under Alternative Growth Rate Assumptions" @default.
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