Financing Assumptions STEP 9

It is now time to start thinking about capital structure. Therefore, let's make some financing assumptions near the top of our model. We will add current interest rates (which can be obtained from Bloomberg, for example), a switch to either assume or refinance the target's debt, the minimum cash balance for the company, the size of the revolver (i.e. total bank commitment), and a switch that lets us choose from several financing scenarios that we will create in a subsequent step.

The minimum cash balance you select is somewhat arbitrary, and is a function of sales, industry, and other unquantifiable factors. For example, some business activities are cash-intensive, while others are not. Minimum cash balances might range anywhere from 2% to 10% of sales. Company management will have a pretty good idea of what figure to use, as might more senior investment bankers. In any case, don't lose any sleep over this number.

The revolver assumption is somewhat arbitrary as well, but should be large enough so that the revolver is not overdrawn and your cash balance never falls below your specified minimum (or zero, which is, of course, impossible). In fact, we'll design this model to prevent you from going below your minimum cash balance and, instead, violate your revolver limit and generate error messages. If, when building your model, you find that your revolver assumption is too small, simply assume a larger number. Of course, there is a limit to how much a bank will commit to lending a given company; leveraged finance bankers can help you put a cap on this number.

We have named most of these cells (using Alt>i>n>d) as doing so makes their use throughout the model easier to understand.