Jan 10, 2021
Free Month
Contribute to the database and get 1 month free* Full online access!
$0
Contribute and get 1 month free!
1 week free for intern submissions
Most Popular
WSO Premium
Full database access + industry reports: IB, PE, HF, Consulting
$8.08 per month billed annually
...or $19 month-to month
Includes All Industry Reports
25k Interviews, 39k Salaries, 11k Reviews
IB, PE, HF Data by Firm (+ more industries)
Private Equity Interview Course
- 2,447 questions - 203 PE funds. Crowdsourced from 750k+ members
- 9 Detailed LBO Modeling Tests and 15+ hours of video solutions.
- Trusted by over 1,000 aspiring private equity professionals just like you.
Related Content
See more-
+3by Painandgain2in PE
-
+5by Brody92in RE
-
+3by AdaWongin PE
-
+2by 1901Monkeyin RE
-
+1by Mr.Onassisin RE
Total Avg Compensation
January 2021 Private Equity
-
Principal (7) $694
-
Director/MD (15) $627
-
Vice President (58) $366
-
3rd+ Year Associate (60) $272
-
2nd Year Associate (116) $246
-
1st Year Associate (250) $224
-
3rd+ Year Analyst (23) $162
-
2nd Year Analyst (57) $138
-
1st Year Analyst (164) $118
-
Intern/Summer Associate (18) $71
-
Intern/Summer Analyst (179) $59
Upcoming Events See all
-
Jan02
-
Jan16
-
Jan02
Comments (6)
Hi Jacobi, whoops, looks like nobody chimed in here.... maybe one of these discussions below is relevant:
More suggestions...
If those topics were completely useless, don't blame me, blame my programmers...
Thinking from the perspective of basic corporate finance, ceteris paribus, no one in their right mind would want to incur the unnecessary additional interest burden and subsequent detrimental effect to FCF generation by drawing down on the entire facility at once vs. drawing down on an as-needed basis.
Assuming you have to do the capex either way, you would have to use cash on b/s to fund instead of debt if you did not draw all at once. The incremental interest from using debt up front is worth it if the capex funds a project that's return is higher than the cost of capital which includes cost of debt which includes interest expense.
An analogy to consider -- would you rather do an LBO where you have to fund more equity up front and slowly recap out your equity with installments of debt annually or take all of the debt up front and put in less equity? Assuming you think the business can pay down the debt you would rather use more leverage up front to generate a higher return even with higher interest expense.
I don't disagree with you and think we may be thinking about it a different way. My take on the question was that it was asking if you have $20M in capex needs each year for the next 5 years, and each year 70% of that can be funded with debt, it would make more sense to fund that on an as needed basis rather than borrowing the full $70M on day 0. As in the cash proceeds from that facility, assuming it can only be used for purposes of Capex, would essentially just be sitting around unused and you paying interest on it without the ability to generate returns with it.
If you can drag that capex forward, as I believe you are alluding to, and earn a higher rate of return than the cost of debt, then it makes sense to do upfront.
Makes sense - depends how you read the question
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Want to Unlock by signing in with your social account?