Depreciation Interview Question
If you have a piece of equipment that was bought for $100, depreciated for 1 year using straight line (5 year life) and sold for $150, what is the effect on the 3 financial statements? THANK YOU
Gonna assume no taxes to make it simple:
I/S
CFS * Net Income: 50 * + D&A: 20 * - Gain on Sale: (70) * + Proceeds from Sale: 150 * Change in Cash: 150
B/S * Cash: 150 * Assets: -100 * Net Change in Assets: 50 * Retained Earnings: 50 * Change in Liabilities + SE: 50
Thus, everything balances out.
Why is "Gain of Sale" on the CFS a reduction in cash flow?
Because the cash flows from selling the asset are accounted for in the CFS under the item "Proceeds from Sale". To prevent double counting, we need to subtract the gain on sale, which is baked into net income.
Thank you so much
If you have senior secured bonds at 180M and unsecured bonds at 120M, EBITDA is 50M and EBITDA multiple is 5x, what price on the dollar would they be approximately trade for? THANK YOU
Company Value: 50*5 = 250M. Senior will get paid first so they will be trading at 180M (100%) and we have 70M left over. Unsecured will only get paid 70M out of the 120M = 70/120 = 58.3%
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