Ib technical
I was reading the biws guides and I came across a answer that didn’t make sense to me. The question involved a acquisition where you used some cash made some goodwill. The next part gave u the foregone interest rate on cash unused to make the acquisition. The part I don’t get is that they subtracted the foregone interest expense on the income statement but then didn’t add it back on the cf statement. Isn’t foregone interest just a non cash expense and more of an opportunity cost? Why would u realize it as a real cash loss
The idea is that is you're losing future income from interest on cash
Ex. Projected net income for company A is $50 for next year. The $50 includes interest on cash. Let's say Company A cash balance was $100 with 1% interest on cash. That $50 projected net income includes the interest income ($100 x 1%). If you use $10 for an acquisition, your net income next year will decrease by ($10 x 1%) because your income from interest will drop.
Would this be when combining the two companies' interest statements?
in the projections its already included as interest income so you must subtract it, its not an opportunity cost at that point.
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You’ll never be asked to answer this. If you are, don’t work for that bank, they are complete nerds.
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