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Hi John,
Dec 2018, Question-3
Can you please explain how opening balance $54,465 in year 2, $37,687 in year 3 and $19,567 in year 4 came from? I believe $70m was bank loan which was year 1. After that, what kind of percentage or inflation rate has been followed through? I look forward to hearing from you soon. Thanks in advance
Loans do not inflate!!!!
The workings for the balances are shown in workings 5 of the answer.
Each year interest is added at 8% (which is given in the question) and the repayment of 21,135 each year is subtracted.
Because the repayment is an equal amount each year over 4 years, we get the amount of the annual repayment by dividing the amount of the loan (70,000) by the 4 year annuity factor at 8% (the interest on the loan).
Hi John,
Looking at the solution of the tax shield on bank loan it seems like the cashflow has been discounting twice:
1) As you have just said the repayment on the bank loan is calculated by dividing $70m by the 4 year annuity factor at 8%;
2) Also once we have found the tax relief for each year the discount factor 8% is applied again;
Can you please explain we couldn’t just assume that the repayment was $18m per year ($70m/4) and than apply the discount rate as per point 2?
Thanks
Sorry John: just realized that the first step is not discounting but compounding.
Please ignore my query.
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