Finance Question about OID, need help answering
Question:
- What happens on a balance sheet (both sides) when a company issues debt at OID, an original issue discount? Assume company issues 100M at 30% OID.
Cash gets higher by 70? Liabilites gets higher by 100? (par value of bond?) and...deferred interest payment gets up by 30? I'm not sure what happens here...
- If COmpany "A" wants to acquire another company "B" for 100M and does it by issuing 100M with 30% OID, is that enough (assuming company A has no excess cash?) Reason I am confused is that technically the company A only gets 70M in cash. What really happens to the mechanics of the acquisition? Or would this only work if the company already had at least 30M of additional cash on hand prior to issuing the OID? (Assuming all cash acquisition and no stock)
bump
the oid is amortized overtime. as such, it doesn't hit the income statemtn all at once but throughout the life of th loan
30% OID is ridiculous - OID (usually 1-3%) is booked as financing fees (an intangible asset) which are amortized over the average life of the loan (standard is 4 years). The liability is booked at par value.
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