Debt Financing Does NOT Create Circularity Within Pro Forma Analysis
13 Pages Posted: 6 Mar 2007 Last revised: 13 Oct 2007
Date Written: October 9, 2007
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: Suggested Citation