Debt Financing Does NOT Create Circularity Within Pro Forma Analysis

13 Pages Posted: 6 Mar 2007 Last revised: 13 Oct 2007

See all articles by Tom Arnold

Tom Arnold

University of Richmond - E. Claiborne Robins School of Business

Peter Charles Eisemann

Georgia State University - Department of Finance

Date Written: October 9, 2007

Abstract

Using debt to finance a firm's external financing need within a pro forma analysis can lead to "circularity" when finding the appropriate value for debt. The circularity incorrectly implies that there is no direct solution for finding the value of debt. In this paper, a direct solution for the value of debt is found; thereby showing that circularity need not exist. Further, the technique is demonstrated to be more accurate than the "additional funds needed" (AFN) approach featured in many texts.

Keywords: Pro Forma, Financial Statement Analysis, Circularity, Sensitivity Analysis, Debt Plug, Slack Term

JEL Classification: G30, G31, G32

Suggested Citation

Arnold, Thomas M. and Eisemann, Peter Charles, Debt Financing Does NOT Create Circularity Within Pro Forma Analysis (October 9, 2007). Available at SSRN: https://ssrn.com/abstract=965547 or http://dx.doi.org/10.2139/ssrn.965547

Thomas M. Arnold (Contact Author)

University of Richmond - E. Claiborne Robins School of Business ( email )

1 Gateway Drive
Richmond, VA 23173
United States
804-287-6399 (Phone)
804-289-8878 (Fax)

Peter Charles Eisemann

Georgia State University - Department of Finance ( email )

University Plaza
Atlanta, GA 30303-3083
United States

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