Another aspect of cash flow based debt capacity analysis is that we can build tranches of debt based on the ability of the company to repay them in different timeframes. So if we take the free cash flows and we present value them over a five year period, that number, in this case, 479.7 million, is the total amount that the business will be able to borrow over a five year period, assuming that we used all those free cash flows to service that one loan. And that will be used both to pay interest and also pay principle and that's the total amount of a one tranche loan. However, we may find that other lenders are willing to lend the company money but they're prepared to wait until year six to get repaid. Now, they're probably going to want to have cash interest in between year zero and year six, but in terms of their repayment, they'll be prepared to wait to year six. Of course, they will probably demand a higher interest rate. So the next thing that we can do is we can take a look at a situation where we're going to service one loan for five years and then another loan, which is repaid in year six. To do this, we actually need to start with the loan repaid in year six first because we've got the total amount of cash available to service the loan in year six as 127 million. Now that 127 million has got to do two things in year six, it's got to repay the principle as well as pay the interest on that year six loan. So in actual fact, the year six loan is only going to be 119.8 million because that's gotta be repaid. And the 7.2 million of interest has got to be paid as well. And that 7.2 million is based on a 6% interest rate. You could calculate the 109.8 million by taking 127 and just dividing by one plus that 6% number in parentheses and that would give you the 119.8 million. Now, that year six loan is going to require interest being paid over the course of not just year six, but years one through five. And this means, that the first tranche loan actually is going to have less cash flow to pay its interest and principle. Now this is looking at it from a mathematical point of view. The first loan, the loan that's being paid over five years will always be senior because it's paid off first, and that'd be a second lien in this case because it's second in line to get paid. So here, if I take the free cash flow and I subtract the interest, I get the cash which is available to service the senior loan and I can just present value those cash flows using the 5% cost of debt. The 5% cost of debt is obviously lower because this tranche gets money back earlier. So the total amount of the first tranche that we can borrow is now 448.6. Now this is lower than the 479 that we had originally and the reason for that is because we've got this new tranche, which is being repaid off in year six but we still need to make the cash interest payments during year one through to year five. So this means, in the second structure we have two tranches of debt. We have one tranche which is the senior tranche and paid off first of 448.6. And then we've got a second tranche which is paid off in one lump in year six. But we're making cash interest payments between year one and year six to that loan holder. And if we add these two items together, we've got a total debt capacity now of 568.4 million. This has increased compared to the original debt capacity if we just had a one tranche loan because effectively we are going out one more year to year six. So we are increasing the debt capacity of the firm by pushing out the ability of the firm to service that debt from not just five years, but in the second case, year six. And that allows us to borrow more. Now, if we start to go out to longer maturities, we will normally need to access different investors. And that's one of the reasons why in many capital structures you will have multiple tranches of debt because different investors will have different risk profiles and different appetites. So our first situation, our single tranche, generated a debt capacity of 479 million. And in the second example, we're using a second loan, which is repaid in the year six. And that means that we can borrow an additional 119.8 million, but that means that the cash flows for the first loan are reduced. So the amount that we can borrow for the first tranche goes down from 479.7 down to 448.6.

But overall with a two tranche structure we can borrow a total of 568.4 million, which is higher than a single tranche structure of 479.7.