Sources and uses
One element in banking/modelling I have constantly seen people dont understand is sources and uses, including myself. I have obviously modelled with it many times, but my understanding is purely mechanical. Therefore I want to see if anyone in here will be able to help me once and for all :)
Lets use a very simple example: say a target has an$ with 20$ in cash and 60$ debt on BS. It is financed with 70$ sponsor equity and 50$ debt (assuming minimum cash balance of what they currently has on BS). This gives a S&U of:
Net debt: 40$
Minimum cash: 20$
Some questions on this as I believe it is the cash element that is confusing:
- What happens here/what will be the difference if they decides to pay down the debt rather than refinance/roll over the debt?
- Why do we use net debt in the uses rather than the gross debt?
- What mechanically is happening with the debt and cash at settlement?
- If we assume no minimum cash balance, what happens with target's cash and debt at settlement then, and would only the net debt be included in the uses still?
- I have seen multiple times that some uses the target's cash in the sources - what does that mean and how is that possible?
Hopefully someone here can answer this, many thanks!