In models with revolver debt, how is interest typically estimated?

• A. Using ending balance only.
• B. Using maximum balance.
• C. Interest is not included.
• D. Using the average of ending balances.

Answer: (D)

Interest on a revolver is charged on the amount of debt that is actually outstanding during the period, which can fluctuate as you borrow and repay. In period-based modeling, a practical way to approximate that exposure is to take the average of the ending balances over the subperiod and apply the rate to that average. This reflects the typical level of borrowing across the period and smooths out swings, giving a more representative interest expense. Using only the ending balance can misstate the cost if there were higher or lower balances earlier in the period, and using the maximum would generally overstate interest. The average of ending balances provides a balanced, realistic estimate of revolver interest.