Dividend Recaps in an LBO Model
I was modeling a dividend recap and ran into some confusion. Here was my understanding of how it would be modeled:
Assumptions
I assume a 3x dividend recap at the end of year 4. EBITDA at end of year 4 is $50. Pre-Recap Debt at beginning of year 4 is $100. After some optional prepayments, my Pre-Recap Debt at end of year 4 is $80. At the end of year 4, my interest expense is calculated by averaging the beginning and ending pre-recap debt balance ($100 and $80).
I issue my 3x dividend at the end of the year 4.
Modeling the Post-Recap Debt
On my Debt Schedule I don't record the $150 (3 x $50) of post-recap debt until the beginning of year 5, because it doesn't influence the amount of interest I pay. At the end of year 4, I only record the $80 of pre-recap debt.
On my Balance Sheet, I do record the $150 at the end of year 4, because that is technically when I took it on. I don't record the $80 of pre-recap debt because it's been replaced by the post-recap debt by the end of that year.
Am I correct in the way I did this?
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