Sources and Uses - question about existing cash on the balance sheet
I appreciate that there are two approaches to defining sources and uses: 1. Having Net Debt in uses and not adding cash from balance sheet in sources 2. Having Gross Debt in uses and considering cash from balance sheet as a source
However, I tried both approaches and they can lead to different capital structures, e.g., if we use the first approach, we will inevitably have a lower overall uses and therefore if we have a minimum equity clause, this will vary based on which approach we use. Can anybody shed some light on this please?
thanks! :) Marco
See the options below, Please use these numbers to explain your problem if this doesn't answer your question.
Target EV: 100 Debt: 50 Cash: 25
Option 1 Uses: Equity proceeds: 75 (100-50+25) + Debt repayment: 50 Sources: Cash 25+ Buyer funding 100
Alternative Uses: EV: 100 + Cash: 25 Souces: Cash 25 + buyer funding 100.
You could also first repay the 25 or pay a dividend before transaction, but buyer funding will always be equal to EV.
Hi! Thanks for the quick reply
I don't think that actually answers my question. So using your numbers you could have two different options
However, in the case of an LBO, if we had a clause specifying that equity should be at least 30% of total funding required you would have different results based on which option you choose. i.e., 30% of 100 vs 30% of 125
Thanks, Marco
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