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.
Copyright © 2008 Financial Education Association. This article first appeared in Advances in Financial Education 6 (Summer 2008): 96-102.
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Arnold, Tom, and Peter C. Eisemann. "Debt Financing Does NOT Create Circularity Within Pro Forma Analysis." Advances in Financial Education 6 (Summer 2008): 96-102.