Impact of $100 Debt in y0,1 on the 3 statements
Hi !
I got an interview question where the guy asked me the impact of a $100 term loan on the 3 F.S for year 0 and year 1. 30% tax rate, 10% amortization, 9% interest rate
for Year 0
Cash flow statements : CFI = + 100
Balance Sheet : Cash =+ 100 ; Debt =+100
Year 1
Income Statement : -100*9% -> interest
-100*10% -> amortization
Net income = -9-10 * (1-30%) = -13.3
CFS : -13.3 + 10 of amortization = Change in cash of -3.3
then for the balance sheet I got a small problem here
if I subtract -3.3 of cash in assets, -13.3 in retained earnings for equity; then I have to add 10 of debt to balance everything
But shouldn't the amortization of debt reduce debt instead of increasing it ?...
Thank you
was this for EB? SA OR FT? Seems hard lol
For an offcycle internship, restructuring in EB
Deleted
Amort of debt is actually paying it off, as opposed to an asset where it's just an accounting change. So cash flow will go down but you don't add back the amort. I'm not sure whether debt amortization would decrease NI, because if it doesn't then everything balances - you'd have change in cash balanced by change in debt and NI (Retained earnings).
(I think this is all true and if so would make sense given the problem)
Debt amort definitely doesn’t affect the IS.
Agreed with the above. It's not a revenue / expense, so no place for it in the I/S.
Hi !
So basically i just don't take into account the debt amortization?
so the change in N.I would just be -9 *(1-30%) = -6.3
and BS : Cash -6.3; Equity -6.3
Is that it ?
Close. You also need to include the debt amortization of 10. So it would be NI = -6.3; CFS: CFO = -6.3, CFF= -10, Cash flow stmt= -16.3; BS: Cash = -16.3, Debt= -10, RE= -6.3
Debt amort is not the same as amort in D&A. It is very much a cash payment to the holders of the debt (this is common in 1L term loans - usually 1% debt amort.) Interest expense is expensed on the income statement, and debt amort is a cash outflow on the CFS.
Debt amort then also decreases your debt balance on the balance sheet. Cash goes to assets side and net income hits your SE.
As stated above, debt amort does not go on the IS. You may be confusing it with amort of financing fees (not included in the scenario you were given) which would go on the IS and added back on the CFS.
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