medium · Investment Banking accounting
Which of the following describes the 'compounding' effect of PIK interest on the Income Statement in Year 2 of a model?
- The tax shield decreases in Year 2 relative to Year 1 because the incremental PIK interest is treated as fully non-cash.
- The Year 2 Interest Expense is higher because it is calculated on the original principal plus the Year 1 PIK interest.
- The Interest Expense remains completely flat across years because the underlying coupon rate itself never changes.
- Interest Expense decreases each year because the company is effectively 'paying down' the loan balance with newly issued equity.
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