Mistakes on WSO PE Prep Pack Models?
I am working through the full-version practice lbo models on the prep pack, and there are some minor differences in the way I usually model versus what is being shown. I could be wrong, but I believe the prep pack has some mistakes and it is driving me nuts... Was wondering if you guys could help me out with the below to figure this out. For reference - I am working on the LBO Full Version #1 for those who also have the prep pack.
1) First, shouldn't OID get capitalized on the Balance Sheet and amortized over the life of the financing? The practice model shows the OID (of $6) being netted against the $600m of new Term Loan debt going to the PF opening balance sheet. So the opening balance sheet shows $594 instead of $600. I understand in reality that is how much the firm will actually receive (I know what OID is so please don't explain it), but isn't OID usually treated as a "fee" and capitalized on the BS accordingly? Usually we see this being expensed / amortized annually. Is this not correct? My entire BB does it this way.
2) On top of the above, the solution model does not have the capitalized financing fees being expensed on the income statement each year and subsequently being added back on to the CFS, despite the Balance Sheet showing a decreasing balance on the Deferred Financing Fees line. This also makes no sense to me and I am not sure how the solution model even balances with that. Obviously this is minor because the cash benefit will solely come from the tax shield on the expense, but nonetheless it does not seem dynamic / accurate to leave that out. Can someone confirm this?
2) Additionally, the solution file has the Purchase Price of Company XYZ as Purchase of Equity ($955) plus total debt ($450). However, there is cash of $100. They do not net out cash to derive an implied Purchase Price / EV, which also does not make sense. They are showing the $100 as a source of funds, but it is not being reflected in the purchase price. This ends up making my model completely different than the solution because sponsor equity is calculated as a % of that, so everything ends up being slightly off. Are they correct in showing it this way?
Thanks!
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