Instructor key — Module 5: Seller Note Engineering: Full vs. Partial Standstill, Balloon Payments, and Earnout Structures
Instructor/solutions version. Keep separate from the student assignment during assessment.
Calculation solution
A conventional $250,000 note accrues 7% annually with capitalization and no payment for three years. Calculate the balance.
Calculated result: 306,260.75000000 (actual USD, except where the question requests a ratio or return). Compound the creditor claim each year; no current cash does not mean no future debt. 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: Simple interest is $300,000 × 6% × 3 = $54,000, giving $354,000 total. Annual capitalization gives $300,000 × 1.06^3 = $357,304.80. The $3,304.80 difference is interest on previously accrued interest. Neither balance implies current cash payment unless the documents permit or require it.
Worked solution: Combined actual annual service is $666,323.54, producing about 1.4216x cash coverage. The current acquisition appendix's non-standby interest-only treatment can require a not-more-than-ten-year amortization for the seller debt. The loan's stipulated cash payment is therefore not necessarily the lender's accepted debt-service amount. Calculate and label both rather than choosing the more favorable result.
Worked solution: Balance becomes $200,000 × 1.08^2 = $233,280. The annual payment is $233,280 × 8% / [1 − 1.08^(−3)], approximately $90,520.46. This is half the chapter's $400,000 example. Early no-payment coverage cannot be used as the entire-life repayment test.
Worked solution: Identify it as contingent additional seller consideration, an earnout, rather than insert an expected payout into a supposedly compliant base case. The current acquisition appendix prohibits seller earnouts. The buyer needs a permissible fixed-price or other approved restructuring, or a different financing route. A low expected payout does not cure eligibility.
Worked solution: Only $70,000 is available above the operating reserve, leaving $330,000 unfunded. Using all $250,000 would still leave $150,000 unpaid and destroy the required reserve. The maturity plan must identify new capital, an approved refinancing, a sale, or revised terms rather than assume that reported EBITDA will turn into a lump-sum payment automatically.