medium · Private Equity accounting-flow
A mezzanine lender offers two options: (A) 12% cash interest or (B) 8% cash + 6% PIK.
Assuming the company has ample cash flow, which option results in a lower debt balance at exit in 5 years?
- Option B, because the cash interest component is lower.
- They are equivalent because the average interest rate is the same.
- Option A, because the total rate is lower and it does not compound.
- Option B, because PIK interest is often discounted at exit.
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