I am looking at Reading 22 - Capital Budgeting, pg 61 of the CFA curriculum, and I just cant seem to figure out where they are getting one of the figures in the table from.
It’s Table 30 I am referring to, and the item is “Debt Repayment” - for example they show a figure of -11,525 for the first year.
It obviously corresponds to the change in “Liabilities” from year 1 to year 2 - but how is it calculated.
I get the “Interest Expense” of 9,146 is just the 109,746 (Year 0 Liability) * 0.08333 (interest rate) - but not sure how they get the “Debt Repayment” figure.
I got stuck on this on my first run through, hoping it would click on my second run through but it’s driving me nuts!
This company maintains a constant 50% debt/value ratio, where value is synonymous with market value. So at the end of year 1, when the market value (see Tabel 29) is 196,441 (this is simply the future cash flows discounted), its debt or liabilities must equal 196,441 x 50% = 98,221. The same computation is performed at each date to wokr out the new level of liabilities. As you already pointed out, the change in liabilities between the dates gives the debt repayment.