Preferred Dividend Question
Hi,
Have three questions on the modeling of preferred stock in LBO. Would appreciate any help on those!
1) Cash preferred dividend payout - does this appear on I/S below NI and before NI to common, or does it appear under cash flow from financing section?
2) PIK preferred dividend - when the preferred dividend is PIKed and then accrued to its outstanding principal balance, where does the accrual of preferred appear on the three statements other than higher carrying value for the preferred stock on the liability side of B/S?
3) PIK preferred calculation - related to the second question, but which balance do you use to calculate the amount of PIK preferred dividend? Is it the beginning preferred stock balance, or the beginning balance minus any mandatory payments (if any)?
1) Appears below NI before NI to Common (along with PIK usually combined into one line item I believe) - top of CFS will be ni to common hence its not in CFF as already accounted for
2) higher CFO from add back of preferred pik div
3) generally average of beginning / end to factor in mandatory payments if any
Thanks for the reply! Much appreciated. Follow up on question 2) and 3):
2) Just to be clear, when there's any PIK preferred dividend incurred, NI to common would be lowered by the PIK amount on I/S, PIK preferred then would be added back under CFO, and carrying value of preferred dividend on B/S will increase by the PIK amount. Is that correct?
3) I thought for cash interest you'd use the average of beginning and ending debt balance. So if that's the same for PIK interest, wouldn't that create circularity in the model, since ending debt balance would factor into any PIK portion?
PIK calculation is based off of beginning balance. You're not PIK'ing a discretionary amount like you would with an ABL draw, so SPA or LLCA will stipulate PIK dates / rates - shouldn't be any circularity with this.
Thanks for the clarification! So for the cash interest on preferred dividend, it would be cash rate * avg. (beginning preferred balance, ending preferred balance), where the ending preferred balance = beginning balance + any PIK accrued this period - any mandatory repayment (if any)?
They will both be based on the beginning balance. Typically, PIK and cash dividends are paid out on the last day of the quarter, so on that day you'll pay out dividends based on what was O/S on the first day of the quarter (since the PIK balance doesn't actually increase until the quarter is over)
I see. Thanks very much for the clear explanation!
1. is this correct? from what i've seen (and done), PIK interest is considered an interest expense in the income statement before net income. I comingled it with cash interest expense as well.
this seems to collaborate with some other sites i did a quick google on.
https://multipleexpansion.com/2020/09/25/pik-interest/#Why-PIK-Interest…
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