Debt financing fee on three financial statements?
The question was :
A company purchases a $200 million machine with $100 million in new debt and $100 million in cash. There is a 5% transaction fee to raise debt. After the 2nd year, the machine breaks down and written off. Walk me through the 3 statements after Year 1 and Year 2.
My approach for Year 1 is:
On the IS
Pre-tax: -5
NI: -3
On the CFS
CFI: -200
CFF: 95
Net change in cash: -108
On the BS
Cash: -108
PP/E: 200
Debt: 95
NI: -3
Is this a right approach? I would appreciate any help!
Assuming that the entire fee is amortized immediately and that the fee is paid in cash and not using the debt raised, the c/f and b/s will look as follows immediately after the purchase.
CFO: (3)
CFI: (200)
CFF: 100
change in cash: (103)
BS
Cash: (103)
PPE: 200
Debt: 100
Equity: (3)
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