as we said earlier the project is
financed with both debt and equity 200 million of debt financing and the rest
is equity as we said in our introduction video the company has managed to secure
bank financing and we can be confident when modeling under the following terms
the debt facility will be amortized in 10 years according to the following pre
agreed repayment plan in years 0 and 1 the company doesn’t pay for debt
reimbursement which would be a significant boost for its initial cash
flow then starting from year 2 onwards the company repays the loan according to
the plan we can easily model the repayment by multiplying 200 million and
the respective percentage extinguished in a year
therefore multiplying the amortization percentage for every year by the initial
debt the company has drawn would give us the amount of debt to be repaid in a
year in the first year the company wouldn’t have to repay anything in the
second year it must repay 10 million in the third year 20 million and so on
below we can see the amount of debt outstanding at the end of the year we
use it to calculate the interest expenses owed by the company I’m sure
you’ll agree it is easily calculated because beginning debt
– repayment gives us outstanding debt the amount of beginning debt for a year
allows us to calculate interest expenses will simply multiply beginning debt by
the agreed 5% fixed interest rate and this gives us interest expenses for a
year as it should be interest expenses decrease gradually over time because
debt is repaid please pay attention that we need the if function because as we
said in our intro lesson the bank agreed to forego interest expenses during the
construction stage so that’s good an additional layer of complexity is the
covenant that needs to be monitored it represents a financial penalty imposed
by the bank when production falls below a certain level a couple of if
statements allow us to model whether a covenant is due
for a year and how much must be paid by the company okay perfect this is how we
model debt to calculate equity we must calculate the firm’s net cash flows
because if cash flows become negative at a certain point in time the company must
increase its equity investment this will do for now thanks for watching