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Question:
What happens to the three financial statements if we use PIK interest?
Answer:
Let’s assume a $100 PIK (Payment-in-kind) loan and 10% PIK interest.
This means there would be $10 of PIK interest expense. This would reduce Pre-tax income by $10 and assuming a 40% tax rate, the net income by $6 on the income statement.
On the Cash Flow Statement, Net Income is down $6, but we add back the $10 of PIK interest because it’s a non-cash expense.
Overall net change in cash at the bottom is +$4.
On the Balance Sheet, cash is up $4 on the assets side.
On the Liabilities and OE side, retained earnings is down $6, debt is up $10, and both sides balance.
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