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I just have a doubt why do calculate the estimate earnings after MBO for the convenant breach, we just need debt and equity figures ryt?
and why do u deduct annuity figure from the loan
To calculate the closing balance of loan
opening minus interest u get closing, and the question states they pay interest annually………How do u calculate the book values of equity and debt, why the value of equity is increasing? debt falling?
We need the retained earnings each year because they form part of the book value of equity.
The loan is repaid in equal instalments which include principal and interest. Dividing by the annuity factor gives the amount to be repaid each year. Then we can calculate how much the interest is, which we need to get the retained earnings.
Equity increases because of the retained earnings. Debt reduces being we are repaying part of the principal each year.
oki, i understood th equity part, can u explain me how do u get 43,342 for debt in the first yr?
oki, Why is the interest added to the opening balance?
when a loan is taken as we pay interest and principal both reduces ryt?Whenever you borrow money, interest is added each year on the opening balance.
By dividing by the annuity factor we can find out what equal amount needs paying each year so that by the end of the loan all the principal and interest has been paid (and the answer ‘proves’ how this works).
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