LBO Modelling for Non Interest Deductible PIK Interest
Interested in confirming approach to modelling this in LBO. Suppose PIK interest on a particular instrument is not tax deductible (for income tax purposes). So in terms of IS / CF impact - take EBIT, subtract Cash Interest from this to get Pre Tax Income, Calculate Tax based on this number, then deduct PIK Interest (no tax shield) to get to Net Income. In CF statement, start at Net Income and then add back PIK interest ?
Based on the most helpful WSO content, your approach to modeling non-interest deductible PIK interest in an LBO is correct. Here's a breakdown of how it would work:
Income Statement (IS) Impact:
Cash Flow Statement (CF) Impact:
This approach ensures that the non-deductibility of PIK interest is properly reflected in the tax calculation, while also accounting for its non-cash nature in the cash flow statement.
Sources: Interest deductibility, DCF Modeling Course ~ Pre-training text.pdf, Working in FIG (Financial Institutions Group) - An Overview.
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