Interest Expense & Preferred Dividends

Now that we have (a) computed period-end debt balances that account for scheduled amortization and optional prepayment, and (b) entered assumptions on rates in Step 6, we can calculate debt interest expense and preferred stock dividends. Note that our projected rates formulas cleverly accommodate both flat rates and spreads to LIBOR. We assume a fixed 2% yield on cash here (for lack of a more logical place to enter this assumption), but you might alternatively use a yield tied to a floating benchmark. Interest income from cash is small, relative to debt interest expense and preferred dividends, so this is a minor detail.

Note the undrawn commitment fee. This is the fee a bank charges its corporate customer for the option to draw down the undrawn balance in the revolver, and compensates the bank for overhead and opportunity costs it incurs in making the facility available, even if the facility is not drawn. The fee is computed on only the undrawn balance (i.e. the total commitment less any amount the customer has drawn down), while the drawn balance yields interest to the bank based on a floating benchmark. The undrawn commitment fee is considered a senior interest expense.