Currently building an LBO model and struggling to solve for two sets of circularity in the model. The model includes a cash sweep on the TLA + TLB, and interest is calculated based on average balances (thus creating the initial circularity). Where the model is now running into problems is that I built out a detailed U.S. tax schedule including the disallowed interest expense carryforward. The calculated interest links into this creating a 2nd circularity as tax affects cash available and cash available affects interest expense.
Any tips on building this without overriding the logic. Current thought is to just calculate interest off opening balances for tax purposes, meaning the model will be slightly off, but would like to hear any solutions that can keep both circularities in.
I don't understand the second circularity. it should be two seperate steps. 1) calculate interest. 2) calculate tax including the disallowed interest expense carryforward. Conclusion is spit out. There should be no link BACK between tax and interest
Tax affects cash flow available for debt service, which flows down into the debt schedule and affects interest since the TLA & TLB are sweeping and interest is calculated on the average balance. Interest then comes back up into the disallowed interest carry forward calculation, which will affect the tax expense.
This looks like a very standard LBO interest / tax relationship so there should be only one circularity
Make sure to have one switch for circular break (for interest) and one for cash sweep
Ultimately your only variable is interest... changes your taxes, changes your cash flow for debt service, changes your end debt balance due to cash sweep, then changes your interest, then changes your taxes, etc. That’s one circularity, not two
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