Getting the Interest Expense Right for the Igr and Pro Forma Analysis

Abstract

In pro forma analysis, often the interest expense is not consistent with the assumptions. For example, the traditional formula for calculating the internal growth rate (IGR) is not consistent with the assumption of no increase in debt. I derive a corrected formula for the IGR that is consistent with a pro forma validation. Also, the calculation of external financing need for a given growth rate often incorrectly assumes interest expense grows with sales rather than increasing proportionally with debt (at least for a first pass solution). I also show a direct calculation for the pro forma interest rate without the need for an iterative solution. This gets the interest expense correct for the IGR and pro forma analysis.