[Technical] PIK Security – Impact on the Three Statements

Job Interview

Issuance of a mezzanine bond of $100 million with a 10% PIK interest

Interview Questions

Answer:

When the bond is issued, $100 million of debt will be added to liabilities of the balance sheet and cash of $100 million will be added to assets. On the cash flow statement, cash flow from financing will list an increase of $100 million as debt raised.

When the PIK is triggered, interest on the income statement will be increased by $10 million, which will reduce net income by $6 million (assuming a 40% tax rate). This carries over onto the CFS where net income decreases by $6 million and the $10 million of PIK interest is added back, resulting in a net cash flow of $4 million. On the BS, cash increases by $4 million, debt increases by $10 million and shareholder equity decreases by $6 million.

 

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