model Debt for Equity exchange that extinguishes principal and accrued interest
I'd like to model an issuance of preferred equity which replaces debt by issuing an amount of equity equal to the principal + accrued interest. Accounting-wise I make the following adjustments:
I/S: adjust interest expense B/S: extinguish principal and accrued interest, replace with equity CFS: no impact
Q: What adjustment do I make to avoid a CFS impact? Currently my model B/S references Accrued interest from the working capital schedule. When in any given quarter I reduce accrued interest to zero to reflect an equity issuance I end up showing a change in working capital, which then shows a use of cash, and an unbalanceing in the model equal to the change in accrued interest. Do I introduce a Deferred interest expense asset to neutralize the CF impact? Thanks.
If I wanted to get fancy with timing of quarter when issuance and redemption of the preferred debt occurs what logic could help me get there? Thanks.
I'm a few beers in, so I may not be thinking clearly or make sense, but my thought is that your working capital should be affected. As you said, the value of accrued interest AND debt should equal the preferred equity, right? Hypothetical example here for CFs... accrued interest = -50, principal debt repayments = -50, equity = 100. That should balance.
PM me your model if you're not in a time rush. I'll look it over sometime tomorrow.
I may be completeley wrong, but itll help me practice. accrued interest expense is paid, you deduct the taxes and get net income. that net income flows into your CFO, and, as CMoore said, a change in your WC should appear in the CFO, since accrued interest is a liability and you're paying it, you put it as a negative change in the CFO. Csh flow from financing should show the amount of principal paid (in this case all of it), and it should also show the amount of equity raised. Equity balances out the debt / accrued interest, and the negative cash change balances with the decrease in net income.
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