Module IV· InterestIntermediate
Question
How do you model interest on existing cash (interest income)?
Answer
Mechanics
Interest income on excess cash — typically low money-market yields, but relevant in high-rate periods.
Deep diveShow more details
Example
| Item | Value |
|---|---|
| Average cash balance | $30m |
| Interest income rate (money market) | 3.5% (current) |
| Annual interest income | 30 × 3.5% = $1.05m |
Comparison (income rate vs debt coupon)
| Item | Rate (2024) | Difference |
|---|---|---|
| Senior Debt coupon (TLB) | 7.75% | -- |
| Cash yield (money market) | 3.5% | -425bps spread |
Consequence
- Cash on the balance sheet earns less than the debt costs → the sponsor should use excess cash to pay down debt
- Interest income reduces net interest expense in the model — a smaller effect
- With a minimum-cash floor (e.g. $10m) income modeling is worthwhile, otherwise marginal
Common pitfalls
- Forgetting interest income → slight understatement of CFADR
- With volatile cash balances (seasonality) the average calculation matters
Pitch tip
Question: "How large is interest income in your model?"
Answer: "Marginal — typically $0.5-1.5m p.a. with a minimum-cash floor of $10-30m. It reduces net interest but isn't a material driver"