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.
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.
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):
Note that the company intends to hold a steady Debt/Value ratio of 50% over the coming 5 years.
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).
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
Over the course of Year 1, the debt balance grows by interest accrued and falls due to interest and principal repayments: