PIK interest treatment in an LBO
Say I have $10 of PIK interest in a certain year, will it increase both my interest expense on my P and L, and then get added back to my net income when going from net income to FCF. So bridging net income to FCF now becomes => net income + D&A + PIK Interest - CapEx - Change in NWC
Would really appreciate some clarification on this, have an LBO test coming up tomorrow.
Cheers
What size firm is it with?
Mid-market, just trying to tidy up my understanding of PIK interest and wanted clarification surrounding PIK interest hitting the P and L and also being added back when going from NI to FCF
On P&L: Pik interest is subtracted similar to regular cash interest.
On CF statement: You add back the full PIK interest amount b/c it's a non-cash expense
On BS: You add the PIK interest to debt (under liabilities) as the PIK increases the debt principal.
Makes sense?
Also curious, is this for a new MM firm?
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