Circular References in Corporate Finance

In this section I explain how you can resolve a couple of circular references that arise in corporate models. The most classic circular reference comes from interest expense and interest income that is affected by financing over the course of the year. In an annual model interest can be computed on the average balance. Developing a user defined function is not that difficult to resolve the circular reference because no loop is required. The video and files below illustrate how to solve this circular reference.