technical question - buy $100 pp&e with 50% cash and 50% debt how does this affect the 3 statements?
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Yea you got it
How is cfi down 50? I’d think it’s 100 since that’s what the asset cost? Please clarify.
Bc cash is down 50
If CFI is down 50 and CFF is up 50 your change in cash is 0
this is where I am confused also - pretty sure my interviewer said cfi is down $100 as well due to the asset being worth $100, but we used 50% debt 50% cash, so $50 each. does this both still fall under CFI making it down $100 or down $50?
cfi is down $100. capex is what shows up in cfi. how much capex did you spend? $100.
it doesn't matter how you financed it - because that shows up in cff.
So then you have +$50 cff from debt issuance and -$50 total change in cash.
Year 0
CFI: CAPEX is here, so $100 down
CFF: $50 increase in debt
Total CFS: -100+50 = -50 change in cash
BS: PP&E up 100, Cash down 50, Debt (assuming long-term) up 50
Income statement: no change
Assuming no interest payments:
PnL: no impact
CF: -100 cf from investing, +50 cf from financing -> change in cash -50
BS: Cash -50, PPE +100, Liabilities +50 -> assets increase by 50, liabilities increase by 50 as well
With interest paid (e.g. 10% interest and 20% tax):
PnL: -5 before tax, -4 after tax
CF: -4 cf from operations, -100 cfi, +50 cff -> -54 change in cash
BS: Cash -54, PPE +100, Liab. +50, Equity -4 -> Assets increase by 46, liabilities as well
How are people saying no IS change? There is incremental interest expense from more debt modestly offset from tax shield from interest and incremental depreciation, right?
They are talking about immediately. Often for this type of question, you'll get asked what's the immediate impact, and then the follow-up may be what impact does it have in year one,
If the company has a solid working capital management and can use supplier financing, they can indeed increase their debt without having to pay interest (which most likely will never work for PPE investments but you get the point…)
I think the main idea of this type of question is to test your basic understanding of how the 3 statements work. If the interviewer wants to dive deeper, he will ask you about the impact of interests paid & depreciation on the new assets, which will obviously both affect the income statement.
SA26s are cooked 😭
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