Interest payment

Short-Interval Compound Interest If interest payments become due m times per year at compound interest, mn payments are required in n years. The nominal annual interest rate Y is divided by m to give the effective interest rate per period. Hence,... 

The interest-rate equivalent of the cash discounts is 2 percent per month, since this discount could he obtained every month if payment were to he made at the beginning of the month rather than, as at present, at its end. Since the hills are settled monthly, the notional interest is paid monthly and should not he compounded. The discount is equivalent to 12 monthly simple-interest payments per year. Hence, from Eq. (9-31) the effective annual interest rate on discounts = (12)(0.02) = 0.24 = 24 percent. It would, therefore, he a good use of surplus cash to reduce this debt as quickly as possible. This would require cash equivalent to one-sixth of the annual hills due, or 16,700, to he avadahle. It can, therefore, he assumed that this level of liquidity is not available for capital projects, either as working capital to reduce the debt or for fixed-capital projects. Further, since the new project will not increase sales, it cannot generate further debt of this kind. Hence, this source is not available to capitahze the new project. 

Equity is available from two sources. First, the company can sell new stock which, if in the form of ordinary shares, carries no interest payment. Although this course appears cheap, its use for projects which do not increase earnings, at least to a compensatory level, is usually inadvisable. This leaves retained earnings as the most likely source of equity for the present project. 

Debt Payments. The method of making principal and interest payments is determined by the terms of the loan agreement. 

Current tax laws allow deductions from revenues for sales expenses, operating costs, amortizations, lease costs, interest payments, depreciation, and depletion. 

The capital charge factor (/3) multiplied by the capital cost of the plant (Co) gives the cost of servicing the total capital required. Suppose the capital costs of a plant at the beginning of the first year is Co and the plant has a life of N years so an annual amount must be provided which is (Co/ + B). The first term (CoO is the simple interest payment and the second (B) matures into the capital repayment after N years (i.e. interest added to the accumulated sum at the end of each year), thus... 

Suppose Ihe profits are paid to the bank to reduce the loan at file end of each year. At the end of year 1, plant 2 would have earned 4,000,000 more than plant 1. Its savings in interest payments for year 2 = ( 4,000,000) (0.07) = 280,000. At the end of year 2, plant 2 has paid 5,000,000 more to the bank than plant 1. 

Even when the interest terms are clearly stated, it often takes some calculations to determine which proposition is best. The next example illustrates the importance of the timing of interest payments. 

The NPV for plant 2 is better than that for plant 1 by 824,000. This could also be calculated by finding the net present value of the savings in interest payments. These are given in Example 1 0-4. 

If you borrow 100,000 from a lending agency at 10 percent yearly interest and wish to pay it back in 10 years in equal installments paid annually at the end of the year, what will be the amount of each yearly payment Compute the principal and interest payments for each year. 

What is the present value of the tax savings on the annual interest payments if the loan payments consist of five equal monthly installments of principal and interest of 3600 on a loan of 120,000. The annual interest rate is 14.0%, and the tax rate is 40%. (Assume the loan starts at the first of July so that only five payments are made during the year on the first of each month starting August 1.)... 

Several issues with the single swap approach are discussed hy Nell (1998 208-9), including its failure to deal with how productivity improvements might speed up turnover, and its exaggeration of the expense incurred hy firms in terms of interest payments. 

Capitalization takes account of interest payments and foregone earnings from investments of comparable riskiness during the lengthy R D investment period for a new drug. 

Furthermore, if the interest payments are instantaneous (i.e., as n approaches infinity), growth in the total principal is governed by the following expression ... 

Bonds When one purchases a bond, the company (or person) acquires an interest in debt and becomes a creditor of the company. The purchaser receives the right to receive regular interest payments and the subsequent repayment of the principm. 

The investigation into return on investment centres around several key assumptions. The initial capital is secured at 25% interest per annum. Interest payments and operating costs are deducted from product sales to obtain gross profit figures. This figure is subject to 49% company tax. The viability of the project is assessed with the requirement that the project show a return on investment within five years. Two scenarios were considered ... 

DAMAGES shall mean any and all costs, losses, claims, liabilities, fines, penalties, damages and expenses, court costs, and reasonable fees and disbursements of counsel, consultants and expert witnesses incurred by a Party hereto (including any interest payments which may be imposed in connection therewith). 

LBO financings require a healthy cash flow for interest payments and repayments of debt tranches. The net debt position also determines the equity value that can be realized for financial sponsors on exit. The two major levers for improved cash flow management are working capital management and a disciplined capital expenditure program. 

Bonds can be bought and sold, like shares, on a special bond trading market, and their trading value will vary around the face value (usually without the spectacular changes that can occur with shares). The key characteristics of a bond are the guaranteed repayment of capital and annual interest payment (so long as the company survives to the maturity of the bonds), but, unlike a share, no ownership rights are conveyed with a bond. 

All loans have to be repaid to the lender, but it is usual for the loan terms to be such as to allow repayment over several years at least 5, and maybe 10. In this case, the outstanding loan will decrease with each year of the plant s lifetime, and the interest payment for each year will fall accordingly. 

Short-Interval Compound Interest If interest payments... 

This ratio is a measure reflecting the basic financial strength of an organization and is important to stockholders, creditors, and employees. It is also an indicator to long-term creditors of a firm s ability to meet required interest payments. To avoid the forced liquidation of a company, earnings must be sufficient to cover fixed interest costs on borrowed fxmds such as bond interest. 

The ratio compares the incomes from continuing operations before income taxes plus the interest expense to the interest expense and measures the number of times that a firm s net income can cover its required interest payments. The formula for this ratio is as follows ... 

Capital charges—these include interest payments due on any debt or loans used to finance the project, but do not include expected returns on invested equity capital—see Section 6.6. 

All debt contracts require payment of interest on the loan and repayment of the principal (either at the end of the loan period or amortized over the period of the loan). Interest payments are a fixed cost, and if a company defaults on these payments, then its ability to borrow money will be drastically reduced. Since interest is deducted from earnings, the greater the leverage of the company, the higher the risk to future earnings, and hence to future cash flows and the financial solvency of the company. In the worst case, the company could be declared bankrupt and the assets of the company sold off to repay the debt. Finance managers therefore carefully adjust the amount of debt owed by the company so that the cost of servicing the debt (the interest payments) does not place an excessive burden on the company. 

Income Support An income-related cash benefit that can be claimed by people normally aged 18 and over who are not required to be actively seeking work and have insufficient income to meet their needs and savings below GBP 16,000. IS comprises a personal allowance for the claimant, partner and any children premiums for families with children, people with disabilities, and carers plus help with some housing costs such as mortgage interest payments. In February 2006, 2.13 million people received IS. Roughly 56% were disabled and 36% lone parents. 

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