medium · Investment Banking
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 because the interest is 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 flat because the coupon is fixed.
- Interest Expense decreases because the company is effectively 'paying down' the loan with equity.
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