Your company is out of cash at the end of 2014. You have a credit line from whic

Question

Your company is out of cash at the end of 2014. You have a credit line from which you can borrow right now. You have calculated your capital cash flows will be –270,000 for 2015. You will borrow now to cover your cash needs for both operations and interest for 2015. You will only borrow once right now in 2014. You have no other debt besides what you are borrowing on your credit line and your cash flow to equityholders will be 0 for 2015. How much do you need to borrow right now in order to cover your cash needs if the interest rate is 10%?

Explanation / Answer

Dear Colleague,

The definition of Cash Flow to Equity Holders is defined as: Net Income - Capitla Expenditure - Change in Net Working Capital + New Debt - Debt repayment.

Well as per the given figures and facts in the question, The Cash Flow to Equity Shareholders will be Zero.

Also there is no debt in the year 2015 apart from the credit line to be borrowed.

Therefore the amount to cover our cash needs for both operations as well as interest payments that should be borrowed should be 300,000.

This is because the interest payment on this credit line for 2015 will be 30,000 as the interest rate is 10% per annum. Thus 30,000 will go towards the interest payment and the rest 270,000 will go towards covering the capital cash flows of -270,000 to match the Cash Flow to Equity Shareholders equal to zero.

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