Reference no: EM132420688
Xenon Ltd borrowed money from CBA bank. The terms of the loan are as follows: 20 year term, annual payments of $10,185,221 paid in arrears, interest rate of 8%.
a) What is the amount of the liability for Xenon?
b) How much of the liability is reduced after the first payment?
c) Skylake Ltd agreed to be guarantor for Xenon's loan. Does Skylake Ltd have to report about being guarantor for Xenon? If so, how?
d) At the end of three years, after the third payment to CBA bank, Xenon Ltd is not doing financially well and it looks like they will default on their future loan repayments. How does Skylake need to report this event and what amounts should be included?
Solutions
a) The amount of the liability is the present value of the future payments. This can be worked out on a financial calculator: n=20, i=0.08, PMT=10,185,221, FV=0. Therefore, PV=$100,000,000. OR using the PV tables of an annuity: n=20, i=0.08 the PV factor is 9.8181 multiplied by payment of 10,185,221 = $99,999,518
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