Difficult Technical Question at Superday with Top EB/BB
"a $500 asset is bought and financed with 50% debt. 5% PIK interest 5% cash interest. the asset depreciates on a ten year straight line basis. what happens to the three financials at t=0? t=1?"
"what if there were a 10% amortization requirement on the debt?"
These were asked at a Evercore Superday for their 2021 SA stint, What are the answers to these? I'm having a little trouble figuring these out. Any help is welcome.
Christ
jesus
Maybe you're a genius but this is hard af
lol good troll
LMAO this isn’t too bad. Standard PIK + Asset purchase
Ight bois here we go I'm also 2021 so feel free to correct if wrong
Year 1: IS: no change CF: CF Investing -500, CF Financing +250 = Net change in cash -250 BS: Cash -250+ Assets 500= Assets +250 Debt +250
Year 2: IS: -50 depreciation + -25 interest= pre tax income down -75 Assuming 20% tax rate NI= -60
CF: Cash initially down -60 but add back 50 depreciation thus cash now down only -10 But PIK interest also non cash so you add that back (half of 25 is 12.5) so now cash is up +2.50 But then you pay 10% debt which is -25 so cash is down a net -22.5
BS: Cash down -22.5 and Asset depreciated 10% so the asset is down -50 so assets are down a net -72.5
Debt down -25 because you payed some off, BUT add the PIK interest to the principal so debt only down a net -12.5 Net income (down -60) flows into retained earnings so SE down -60
Assets: -72.5 (-50-22.5) L+SE: -72.5 (-12.5-60)
EVERYTHING BALANCES
You didn't recognize the PIK in year 2 on income statement.
The interest is 5% PIK and 5% cash which is 12.5+12.5=25, but you're right I didn't explicitly mention how I arrived at 25 which one should probably do doing during an interview
^Yea. the PIK interest has to be factored into income statement too ($25 non cash interest expense). so pre tax income on I/S would be down $100
Y0 - IS = no change - CFS = $500 outflow under CFI, 250 inflow under CFF, net change in cash is -$250 - BS = cash down $250, PPE up $500, so assets up $250. Debt up $250, so L&E up $250 and it balances.
Y1 - IS = $75 decrease in pre-tax income from interest and D&A. Assuming tax rate of 40%, NI down $45. - CFS = -$45 flows into CFO. Add back D&A, CFO shows +$5. No change to CFI. CFF shows increase in $12.5 cash because of PIK interest, net change in cash is +$17.5 - BS = Cash up $17.5, PPE down $50, so assets down $32.5. RE down $45 from the net income, debt up $12.5 from the PIK interest, so L&E down $32.5 and it balances.
If there were a 10% amortization then it would be the exact same as the previous year 1, except you’d also show a $25 debt repayment (which is not tax deductible). IS shows -$45 NI, CFS $50 D&A add-back brings CFO to $+5, with $12.5 PIK interest added back and a $25 outflow from the amortization in CFF, CFF is -12.5 in total so net change in cash is -$7.5. Cash down 7.5, PPE down $50 so assets down $57.5. RE down $45 from the net income, debt down by $12.5 because of the repayment, and L&E down $57.5 to make it balance.
assets are up 250 in yr 1, not 500. Just a simple arithmetic error. Also need to add depreciation above EBIT.
Yeah my bad, honestly I wrote it all down too quickly to realize it + I’m typing on my phone so it was hard to see the mistake
You forgot that the asset depreciates straight line over 10yrs.
Fixed, forgot about that part
OP. are you at a target?
When freshmen are more prepared than you are
Confused on the 5% cash interest part... how does that factor in?
Is that just the foregone interest on cash in year 2 given that $250 was financed via balance sheet cash?
Would really appreciate it if someone could explain!
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