Level 2 Volume 3 Reading 25

Hi, guys. Long time lurker, first time poster.

In the Capital Budgeting reading, under section 8.2 (Economic and Accounting Income), page 57 through page 58: On the condensed financial statement table, can someone please explain how the “Debt Repayment” numbers under the “Financing Cash Flows” section were calculated?

I understand the interest expense calculations on the debt. For example, in the first year, the interest payment is $109,746 * 0.0833 = $9,146. However, I am unable to decipher the principal amount paid in the first year. Once I know how this amount is calculated, I can get to the “Debt Repayment” number under the “Financing Cash Flows” section.

Thanks for any help.

learn the amortization function of your BAII plus

I did, and the numbers don’t seem to work out. Hence, the question :). Sorry for not mentioning that in my original post. Maybe I’m missing something obvious, but someone else verifying the inputs wouldn’t be bad.

^ sorry didn’t mean to sound condescending… i’m not looking at that reading right now, but i’ll be interested to see what some replies here are.

Retried the numbers (even using the begin mode), but no luck. Anyone looking at the material, please chime in!

Hi Ather,

I took the Level II exam some years ago, but just had a brief look at my old 2009 Curriculum book, and I think I found the same example there. I think this may help (assuming the numbers have not changed):

  1. Note that the company intends to hold a steady Debt/Value ratio of 50% over the coming 5 years.

  2. At the beginnig of year 1 (or point 0), the company’s value, as measured by the present value of expected after-tax cash flows is $219,492, which is why the initial debt amount is set at $109,746 (50% of $219,492).

  3. At the end of year 1, the same debt to value ratio will have to be maintained. Value is given by the PV of the remaining after-tax cash flows (Year 2: $60,000; Year 3: $75,000; Year 4: $60,000; Year 5: $51,000) discounted at 10%, resulting in $196,441. This gives a value for debt of 50% x $196,441 = $98,221

  4. Over the course of Year 1, the debt balance grows by interest accrued and falls due to interest and principal repayments:

Closing balance = Opening balance + interest accrued - interest repayment - principal repayment

$98,221 = $109,746 + 0.0833 x $109,746 - 0.833 x $109,746 - PRINCIPAL REPAYMENT

so PRINCIPAL REPAYMENT must equal = $11,525

So, this example has nothing to do with standard debt amortization on you calculator :slight_smile:

I hope this works with the numbers in the 2013 curriculum :slight_smile:

Beautiful, Wojtek. Thanks for the math! Much appreciated. The numbers still work in the 2013 curriculum.

I’d be surprised if this actually happens in the real world?!?

that’s right, I think this is purely hypothetical