easy · Private Equity accounting-flow
A sponsor acquires a target with $40 million of EBITDA and structures the deal with $80 million of PIK debt at 12%.
If the exit occurs after 5 years at the same entry multiple, how does the PIK debt affect the sponsor's exit proceeds compared to cash-pay debt of the same amount?
- Exit proceeds are lower because the debt balance has grown through accretion
- Exit proceeds are higher because the company saved cash during the hold period to pay down senior debt
- Exit proceeds are the same because enterprise value is independent of the debt structure
- Exit proceeds are higher because PIK debt is treated as equity in the enterprise value bridge
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