From the course: Financial Modeling and Forecasting Financial Statements
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Forecasting interest and income taxes
From the course: Financial Modeling and Forecasting Financial Statements
Forecasting interest and income taxes
- Here is another look at HAAN Company's forecasted income statement for year two given the preliminary assumptions. Interest expense depends on how much interest-bearing debt a company has. In year one, HAAN Company reported interest expense of $30 with a bank loan of $300. These numbers imply that the interest rate on HAAN's loans is 10%, 30 divided by 300. Because the bank loan is expected to increase to $400 in year two, HAAN can expect interest expense of $40. $400 loan times the 10% interest rate, that's the $40. Of course interest rates are not constant. A careful forecast would require looking at the current level of interest rates in the economy and making any necessary adjustments. For example, if loan interest rates for companies of HAAN's riskiness have increased from 10% to 12%, then a better forecast of year two interest expense would be $48. The $400 loan times 12%, that's the $48. Income tax…
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