Technicals - Writing down liabilities, stock vs cash
Why is it that when we have a $100 write down of debt (liability) you record it as a gain on your Income Statement?
Also, when you can choose between 100% cash (or debt) vs 100% stock to pay for a transaction, which one would usually have a higher chance of making the merger Accretive?
I'm thinking that cash would have a higher chance of being Accretive b/c cash is cheaper than debt and the foregone interest on cash would be lower than if you had use debt (5% interest rate for cash vs 10%+ for debt). And also, when looking at cash vs stock, cash would be much cheaper than equity and if one chooses to issue equity it could dilute the shares and lower price per share, effectively lowering P/E ratio.
Cash would have higher chance of making the merger accretive b/c stock would dilute shares and lower eps
a. What else would you do with it? Same as if you write down an asset (depreciation). More correctly, it reduces liabilities without reducing assets, and anytime a transaction doesn't balance itself on the balance sheet, it belongs on the income statement. b. Bit of a tough question. It would get into the imperfections of accretion analysis - if defined strictly as P/E ratio, then the P would include the cash you have on hand to finance the acquisition before this ever happened, which would have been diluting your PE ratio anyway. Without thinking too much though, I think debt is the answer, but in efficient markets it all doesn't matter.
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