The next workout then goes on to look at how things might work for a bullet loan. In this example, Blitter Inc. is looking at taking out a five year cash interest bullet loan with a 7% interest rate. We have to pay the interest every year that accrues on the loan, but only have to pay the principle back at the end of the six-year time horizon. The company's forecasting they have £500 million in year six for debt servicing. So we need to calculate the size of the loan that Blitter can take out, based on its Year Six cash flows alone. So if we're assuming that we have £500 million available for debt service in Year Six, then we need to calculate how much we can have outstanding as our principle at the beginning of Year Six to be able to afford to repay all of that balance and also the interest that accrues during Year Six as well. Before we dive into any calculations, we need to go and calculate the post-tax interest rate, taking the interest rate and multiplying it by one minus the tax rate.

But from that we're able to calculate how much we can have outstanding at the beginning of Year Six and afford to repay all of that principle and the interest that accrues during Year Six with the $500 million that we are saying we have available during that sixth year. So if we take the $500 million and divide it by one plus our post-tax interest rates, that'll give us 473.5.

This is the maximum we can have outstanding at the beginning of the sixth year and afford to meet the interest payment based on the 5.6% post-tax interest rate applied to that opening balance of 26.5 with the 500 million that we have available. So if we have 473.5 outstanding at the beginning of the sixth year, that amount will attract interest of 26.5. We have 500 million available during year six to make principle and interest payments and we cover that exactly.

So the most we're able to have outstanding at the beginning of Year Six, 473.5. Well, this is a bullet loan, which means all of the principal's gonna be repaid during the sixth year which means that the amount we can borrow at most today is that same amount, the 473.5. That therefore is gonna be our opening balance for Year One. The interest is gonna be our interest expense, and I'll fix on that, multiplied by the opening balance at 26.5. In this example, we're gonna have to find from somewhere the 26.5 million of interest to pay every year. So we find the 26.5 to pay every year during the life of the loan. We're just paying the interest, which means that the ending balance remains the same as the opening balance 'cause the only cash payment that we make is in relation to the interest. So as a result, if we then just copy this to the right for the whole first five years of the loan, you can see that it's not very interesting 'cause nothing really much changes. Every year we have the same interest amount because the interest rate doesn't change and the opening balance doesn't change. We make cash payments just of the interest amount for each year. We only repay principal with the 500 million we have available in the sixth year.