IB Technical Question
So I have two main questions.
the first one is this. I was reading the biws guides and there was a question regarding the acquisition of another company. U had to add their assets, liabilities, and create some goodwill. Afterwards, they told u there was a 2 percent foregone interest on the 1000 dollars in cash you used to buy the other company. They wanted u to show this effect on the three statements. They included the expense on the income statement but when they went to the cash flow statement they didn’t add back the loss in foregone interest. I don’t get why they didn’t add it back because the foregone interest loss to my understanding is a non cash expense. I viewed it like an opportunity cost essentially. Can someone explain this please
My second question is during the classic 10 dollars of depreciation and its effect on the three statements question(use 40 percent tax rate) when you get the net income down 6 go to cf from ops and add back 10, would you not also subtract 4 for increase in deferred tax asset since ur at a net loss? You still would actually pay cash for those taxes but you know have this tax asset right?
https://samples-breakingintowallstreet-com.s3.amazonaws.com/22-BIWS-Merger-Model-Cheat-Sheet.pdf
see bottom of p5 through p8
nebulous concept, wouldn’t worry that much about it lol
Thanks so much! I just read through but I’m still very confused so would you mind explaining both questions if you could. Once again thank you.
Sure-
1: for modeling purposes, it is a cash expense. the target company isn’t actually incurring it, but I suspect that’s not what you’re trying to measure. you’re measuring the acquirer’s returns - and for them, it is a cash expense in that it’s a genuine foregoing of cash incurred in order for them to own targetco
2: can you clarify the q
1. I see, I haven’t got to any of the other guides yet like LBO I started with accounting first so that’s why I was confused why it is recognized as a cash expense on the cash flow statement. I understand why for modeling purposes it would be counted as a real cash loss since you are literally missin out on potential cash to make the acquisition. Is it weird that they still did that on the cash flow statement though? Shouldn’t that be different than modeling cash returns in a LBO? To clarify, I’m referring to the cash flow statement of the acquiring company. It was my understanding that the cf statement tracks literal cash in and out which this expense doesn’t actually cause any cash outflow for the company
2. I guess my question put simply is so you create a deferred tax asset when you have only a 10 dollar depreciation loss.
1: not rly weird if the point of the exercise is to have an integrated financial model that takes buyer’s trx financing considerations into account
2: still don’t fully understand the q, but are you familiar with tax basis vs. book basis accounting (especially w/r/t acquisition-linked asset step-ups in book basis of assets?) if not, read up on it and I bet you’ll find your answer
1. Ok thank you!
2. yea I read up on cash versus book and I understand how liabilities are created from timing differences like depreciation(straight line vs accelerated). But in this case because the company has negative income so a net operating loss, isn’t a deferred tax asset created. Their in a NOL because depreciation expense is the only thing.
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