50.1K

Verified Solution

Link Copied!

Please use the following information to complete the Part2 Q1:

Year 1: The capital supplied by investors is considered as a long-term debt. You need to make interest payment to the investors or creditors. The company should use the FCF to arrange this payment. After making the interest payment, the net free cash flow (FCF after interest payment) will be used to pay off the principal, which is $2,150,000. (This is actually depending on the companys decision. But, as far as you know, your company wants to pay off all debts ASAP using FCF.) Excess wealth is the amount of cash on hand after paying everything.

Year 2: The principal will be changed because your company paid a certain amount of money in year 1. This change will affect the interest payment that your company must make in year 2. Again, the change in the interest payment in year 2 will affect FCF after the interest payment and payment to principal.

Year 3: Similar to year 2.

Year 4: Similar to year 3 except for one thing. After making the interest payment, the company will have a large amount of cash on hand, which is more than enough to pay off the final principal.

P2-Q1:
Year	0	1	2	3	4
Principal
FCF		$665,000.00	$665,000.00	$665,000.00	$665,000.00
Interest obligation
Interest payment (actual)
FCF after interest payment
Payment to principal
Excess wealth
Present value (at the beginning of year 1 which is the same as the year 0) of Excess wealth in Year 4:

Answer & Explanation Solved by verified expert

See Answer