guys, i am preparing a financial model of a manufacturing company and have run into problem modeling debt schedule
Suppose i took a debt of $1mn before starting the project and principal payment doesn't start for 2 years and interest is x%.
How do I model my debt?
A. In year 3, when debt starts being paid I add interest during construction for 2 years to $1mn and spread it across for principal and calculate respective year's interest?
B. In year 3, my principal still remains $1mn/(debt maturity). in this case, the IDC for 2 years gets added to third year?
Case A. You capitalize the IDC so you create an asset, and then expense it across the life of the project.
I don't get the question. Are you saying the firm has a 2 yr interest free period, then starts paying interest in year 3 on a bullet loan? Or that the company pays interest in the first 2 years, but the loan starts amortising in year 3?
If the former, the principal will still be 1mn in year 3. The whole point of the interest free period is that you don't pay interest at all. If it's deferred interest (i.e. PIK), then the interest will get rolled up to the principal amount in year 3, yes.
So if 1mn 10% loan with 2 year interest free period, in year 3, principal = 1mn interest = 100k Interest to date = 100k
If 1mn 10% loan with 2 year PIK interest, then in year 3 Principal = 1mn x 1.1 x 1.1 interest = 10% x principal amount above and principal balance till final maturity (assuming bullet and not an amortising loan) = 1mn x 1.1 x 1.1
Xoxohth
Thanks Oreos for your reply.
Just to confirm, in the below link, for a 16 year payment, I have taken 7.8/16 as my prinicipal account deduction. Is this correct?
http://imageshack.us/photo/my-images/580/debt.jpg/
NewGuy, thanks for your reply. I am working on a case study that I got. Nothing is mentioned except "The term loan will be paid in 16 half yearly payments, with the first installment falling due at the end of second half of the operating period and interest on outstanding amount is 14%"
I do have the sample o/p of diff sheets and it follows your case 1
However, I worked on a previous case study of a power plant, wherein your case 2 was taken and thought that to be the norm of the industry (case 2)
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