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Hi sir
Wanna ask part b debt to equity ratio computation, the opening balance of equity, why is it 16,000 but not 16,000+ 4,500( which is also the existing equity of Tyche)?
Thanks in advance .”Firstly, 4,500 is not the existing equity of Tyche – it is the retained earnings.
Secondly, and more importantly, Tyche is being sold as a MBO and so the new equity to start if off again as a new company is given at the end of the second paragraph as 12M + 4M.
Dear John,
In this particular question, May I know how the interest payable is calculated and how to calculate the outstanding loan at the start of the year.
Thanks.
The initial loan is 81M (market value) – 12M (from managers) – 4M (from venture capital) = 65M
The interest is at 9%. So the first years interest is 9% x 65M = 5.85M
They pay back 3M a year, so the amount owing at the start of the second year is 65 – 3 = 62M.
So the interest in the second year is 62M x 9% = 5.58MThe amount owing at the start of the third year is 62 – 3 = 59M
So the interest in the third year is 59M x 9% = 5.31MAnd so on…… 🙂
John i am.bit confused that if the initial amount of loan is 65m and they are paying interest of 9% ie 5.85m so will the loan amount outstanding at the year end not be 59.8m ?
And secondly while calculating debt to equity ratio for yr 1 why have we taken 62m and not 65m as initial loan amount was 65 m ?If you borrow money you have to pay interest on it. Paying interest on it does not reduce the amount owing – you still owe the full amount of the loan unless you repay some of the loan (and here they do repay 3M a year).
The question says that the debt-equity ratios are as at the end of each year for purposes of checking on the covenant. At the end of the first year they owed 62M because they have repaid 3M.
Okay thanks john but if it would not have been written in the question ie at the end of each year so are we supposed to take the amounts at the start of year ?
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