Instructor key — Module 1: The SMB Capital Stack: Leverage Dynamics, Senior Debt, Mezzanine, and Equity
Instructor/solutions version. Keep separate from the student assignment during assessment.
Calculation solution
Buy for $1.5m with $900,000 interest-only debt at 10% and $600,000 equity. Sell one year later for $1.7m, no other flows. Calculate equity return.
Calculated result: 0.18333333 (actual USD, except where the question requests a ratio or return). Sale proceeds after principal and interest are $710,000; gain $110,000 on $600,000. Use appropriate display rounding while retaining formula precision. This result is generated from the independent assignment inputs, not copied from the chapter answer.
Conceptual and judgment marking
A complete conceptual response identifies the measure's economic purpose, the defined perimeter and the risk of confusing it with another metric. Award up to 20 points for explanation, not terminology alone. For the applied question, award up to 15 for linking evidence to a concrete acquisition consequence; do not require an optimistic recommendation.
Spreadsheet marking
Award 15 of the 30 spreadsheet points for live links from assumptions, 10 for a coherent 10% mutation and predicted direction, and 5 for units, readable formatting and checks. Inspect formulas directly rather than accepting cached numbers. Use the instructor workbook for the controlling capstone model; this independent lab uses different inputs.
Calculation marking: 10 points for the correct equation/perimeter, 15 for intermediate arithmetic, and 10 for result, units and rounding. Overall pass requires 80 and all critical checks in the student version.
Original chapter practice solutions
The following solutions were moved out of the chapter so full answers no longer sit immediately below student questions. Match them in order to the chapter's practice problems.
Worked solution: An all-equity return is $300,000 / $2 million = 15%. Leveraged proceeds are $2.3 million − $1.2 million − $120,000 = $980,000, a $180,000 gain on $800,000 or 22.5%. At the lower sale value, proceeds are $380,000, a $420,000 loss or 52.5%. The leverage effect arises from allocating the residual over less equity, not from higher operating performance.
Worked solution: Year 1 cash interest is $30,000 and PIK is $15,000, producing ending debt $315,000. Year 2 cash interest is $31,500 and new PIK is $15,750. The deferred cost compounds. These mechanics do not establish that an SBA lender would permit the instrument.
Worked solution: Unlevered taxes are $125,000. Taxes after interest are $100,000 on $400,000 pretax income. The shield is $25,000. If the financing forecast already subtracts $100,000 taxes, do not add the $25,000 again. Interest reduces cash by $100,000 but saves $25,000 tax under the stipulated assumptions.
Worked solution: Residual equity value is $5 million − $3 million − $400,000 + $200,000 = $1.8 million. It is a value allocation, not a bank balance. Payroll liquidity depends on actual available cash, collection timing, and restrictions. If the $200,000 is required operating cash rather than distributable excess cash, the bridge needs a different assumption.
Worked solution: The equity contribution falls $200,000, but annual residual cash falls $40,000 before any tax effects. Recalculate debt-service coverage, monthly liquidity, maturity obligations, and expected equity proceeds. Confirm senior-lender permission and program treatment. A higher modeled percentage return can coexist with lower cash resilience and larger personal exposure.