Hi fellow monkeys -
I am currently completing a case as a second round interview for a boutique IB in Chicago. The case is basically projecting cash flows for a widget company. My main problem comes in with debt amortization. In the case they say:
Year 1 interest expense: $200,000
Annual interest rate: 5%
Annual principal amortization: 5% of principal balance
If the interest rate is 5%, my principal balance at Year 0 is clearly $4MM. However, if there is principal amortization of 5%, wouldn't this reduce my principal to 3,800K at end of year 1, $3,601K at end of year 2, $3,429K at end of year 3, etc. And if my principal balance is declining, would this not affect my interest payment at rate of 5% (which is initially 200,000, but would decrease to 190K, then 180.5K, etc.)?
This factors in on my income statement, and when i project Levered FCF, I need to add back the amortization and subtract mandatory debt payments at the end. Do these mandatory debt payments only include interest payments, or does it also include my amortization of principal balance?
Any help would be vastly appreciated. Cheers.
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