Circular Reference between Principal´s equity % calc

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November 19, 2024

by a searcher from HEC School of Management, Paris in Barcelona, España

Hi All,
I am sure this is very easy to solve but I m kinda blocked in this circular reference where you define the Principal´s equity % depending on the level of IRR the investor take after the Principal´s equity payout. Any hints on how to solve this and model this in excel?

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commentor profile
Reply by a searcher
from University of Sheffield in London, UK
Most of these type of issues can be removed by modelling an interim row with pre-waterfall transactions and then the function your calculating, then a final closing balance.


Otherwise you can try to use maths to work out the function without the reference.

Otherwise you can accept it’s a model and add an assumption for an estimate or buffer that trues up each subsequent period with a new estimate can help get past the problem. A model is only ever a set of assumptions so this is often easiest.
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Reply by an intermediary
from The Johns Hopkins University in Gainesville, FL, USA
If you use iterative calculation, make sure that you use it carefully. Start with a small number of iterations (I usually start with###-###-#### Smaller "maximum change levels" need higher iteration numbers, so start with something a bit larger that will overshoot your expected convergence within 25 iterations. Increase iterations and decrease the maximum change level as needed to improve accuracy.
If you are not using it frequently, it might be easier to just break the chain!
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