Question

A tourist company is borrowing money from FundingParner to purchase a yacht to use in expeditions with customers. The purchase price of the boat is NOK 5 million, and the acquisition will be financed 80% with debt. The loan will be secured by 1st priority pledge in the boat. The tenor of the loan will be 5 years, but the loan will have a 10-year repayment profile such that 400 000 of the loan will be repaid each year. The yacht depreciates by 10% each year.

a) Based on this information, construct the balance sheet for the company after the purchase. Assume that the yacht will be the company’s only asset. Hint: Assets = Liabilities + Equity.

b) In a default scenario, it is expected that the yacht would be sold at a discount of 50% due to forced sale. How much would the lenders expect to lose each year in a default scenario?

Answer 1

Answer a]

Balance Sheet of ---- Company after the purchase of yacht

Liabilities	Amount $	Amount $
Equity		1000000
Loan for Yatch		4000000
	Total	5000000
Assets	Amount $	Amount $
Yatch		5000000
	Total	5000000

Answer b]

Statement showing loss to lenders each year in default scenario

Year End	Amount $
1 Yatch Value	5000000
Less Depreciation at 10%	500000
Net value at year end 1	4500000
In case of default at the end of year 1 Yach will be sold at 50% of book value	2250000
So loss at year end 1 to lender will be [4000000-2250000]	1750000
2 Yatch Value	4500000
Less Depreciation at 10% on original cost	500000
Net value at year end 2	4000000
In case of default at the end of year 2 Yach will be sold at 50% of book value	2000000
So loss at year end 2 to lender will be [4000000-400000-2000000]	1600000
3 Yatch Value	4000000
Less Depreciation at 10% original cost	500000
Net value at year end 3	3500000
In case of default at the end of year 3 Yach will be sold at 50% of book value	1750000
So loss at year end 3 to lender will be [4000000-800000-1750000]	1450000
4 Yatch Value	3500000
Less Depreciation at 10% original cost	500000
Net value at year end 4	3000000
In case of default at the end of year 4 Yach will be sold at 50% of book value	1500000
So loss at year end 4 to lender will be [4000000-1200000-1500000]	1300000
5 Yatch Value	3000000
Less Depreciation at 10% original cost	500000
Net value at year end 5	2500000
In case of default at the end of year 5 Yach will be sold at 50% of book value	1250000
So loss at year end 5 to lender will be [4000000-1600000-1250000]	1150000
6 Yatch Value	2500000
Less Depreciation at 10% original cost	500000
Net value at year end 6	2000000
In case of default at the end of year 6 Yach will be sold at 50% of book value	1000000
So loss at year end 6 to lender will be [4000000-2000000-1000000]	1000000
7 Yatch Value	2000000
Less Depreciation at 10% original cost	500000
Net value at year end 7	1500000
In case of default at the end of year 7 Yach will be sold at 50% of book value	1000000
So loss at year end 7 to lender will be [4000000-2400000-1000000]	600000
8 Yatch Value	1500000
Less Depreciation at 10% original cost	500000
Net value at year end 8	1000000
In case of default at the end of year 8 Yach will be sold at 50% of book value	500000
So loss at year end 8 to lender will be [4000000-2800000-500000]	700000
9 Yatch Value	1000000
Less Depreciation at 10% original cost	500000
Net value at year end 9	500000
In case of default at the end of year 9 Yach will be sold at 50% of book value	250000
So loss at year end 9 to lender will be [4000000-3200000-250000]	550000
10 Yatch Value	500000
Less Depreciation at 10% original cost	500000
Net value at year end 10	0
In case of default at the end of year 9 Yach will be sold at 50% of book value	0
So loss at year end 10 to lender will be [4000000-3600000-]	400000