From the course: Financial Modeling Foundations

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Interest rate assumptions in models

Interest rate assumptions in models - Microsoft Excel Tutorial

From the course: Financial Modeling Foundations

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Interest rate assumptions in models

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Interest rates are often a critical element in financial models. They drive cost of debt which is a major expense that determines business outcomes. Figuring out reasonable interest rates to use can be tricky though. Now we have this firm that we're considering a buyout for. And the firm has 100 million dollars in debt. We're assuming that the interest rate will be 8% on that debt. And then the annual interest rate change will be 1% per year. That is, rates will rise by 1% each year. However, If we change these assumptions. It's pretty easy to see that the net income shown here will change. So, if we instead cut interest rates so they're only rising half a percent per year our net income now goes up to 8.3 million dollars versus the 5.3 it was before. Similarly if our interest rate is only 6% or 5%, instead of 8%, net incomes are also higher. So, what's a reasonable interest rate to use? Well to answer that question, we'd really like to draw on outside data. To do that, FRED can be a…

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