Question

Question 7 [15 A friend of yours approaches you for some financial advice regarding an outstanding property finance loan with the Landbank of R2 600 000. He tells you that he is repaying this loan with a monthly instalment of R35 000. He got the loan at a rate of 12.5 % /annum compounded monthly at the end of each month. He wants to know how much interest he will have to pay over the next six months and how much capital will still be outstanding on the loan after the next six months. 7.1) [10] Explain the principle of positive financ ia l leverage /gearing 7.2) [5] The end 61

Answer 1

Answer 7.1)

Loan schedule for next six months would be as follows

Month	Principle	Interest	Installment	Amount Due
1	2,600,000	27,083	35,000	2,592,083
2	2,592,083	27,001	35,000	2,584,084
3	2,584,084	26,918	35,000	2,576,002
4	2,576,002	26,833	35,000	2,567,835
5	2,567,835	26,748	35,000	2,559,583
6	2,559,583	26,662	35,000	2,551,246
		161,246	210,000

Total interest paid for first 6 month is 161246

Amount due after first 6 months is 25,51,246

Answer 7.2

A positive financial leverage means that the assets acquired with the funds provided by creditors and preferred stockholders generate a rate of return that is higher than the rate of interest or dividend payable to the providers of funds.