That’s his starting point, which then changes to this:
The big increase is, however, in interest costs. The company pays interest at 3% over bank base rate. So, the rate has grown from near enough 3% to 8%, or a growth of about 160%.
So, he’s assuming at that start a base rate of zero, so a 3% interest bill.
OK. So, how much debt does the company have? Well, to be paying 5 when the interest rate is 3 then they must have outstanding debt of 170 (-ish).
Now it’s true that I’m not an accountant, nor am I a banker or financier. But a services comany – which Spud says this is – with a debt burden of 170% of sales? 170% of sales, note.
I don’t know, really, I don’t. But would that be considered – by an accountant – to be a reasonable modelling assumption?