So my model is a based on a $100M project, 50% LTC would require would $50M in equity so the sources would be $50M of equity, $50 mil of debt.
But I have negative operating cash flow in the first few months such that when I calcualte contributions, the equity portion is > than sources of equity.
Is that alright?
Or does another calcualtion need to be done to account for negative cash flows in the beginning periods?
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If your initial purchase price is $100 MM and you are doing 50 Mm debt and 50 MM, equity, and than the first few months you have negative cash flow, your model is correct. You will need additional equity (or debt) to plug the gap.
If you are only supposed to need the $100 MM to buy the asset and pay the negative cash flow, are you modeling an operating reserve or interest reserve? If you don’t have that, it explains why there is a gap.
This - if there's an express limit of $100M (e.g. for an interview test), then you absolutely need to model an operating reserve. If it's for work and your firm doesn't want to model a reserve then yes, it will increase the equity requirement.
Thanks for the reply.
There isn't really a hard limit to the $100mm but I want to know if there will be questions when the sources and uses tab shows a certain amount of equity required but the contributions on the waterfall summary shows another number for equity required?
I did model interest reserve but I thought that was only for interest and just roll back up into the loan.
I did not model for capital reserves correctly I think becuase I am not sure how that works.
The contributions in the waterfall should reflect reality, i.e. the negative cash flow in those couple months. The money has to come from somewhere
And its ok if there is a variance between the equtiy contributions and the equity sources?
No, they should line up. You should include the initial operating deficit in your uses to offset the corresponding increase in sources
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