Here we are given a part complete model for a company with a payment in kind or pick interest.

Note, we're going to complete the model by including the appropriate income statements, balance sheet, and cashflow statement entries in respect of the pick note.

Let's start by taking a quick look at the information provided.

Our debt assumptions include debt issuance and repayment each year, and the interest rate on borrows in cash, including the interest rate on the pick note, which should be based on the contractual rate.

In the calculation section, we have empty based calculations for both the pick note and a bank loan.

The income statement is almost complete, but is missing the financing items for both the pick note and also cash interest, income and expense.

The balance sheet is also nearly complete, but is missing long-term debt.

This will need to include the balance on the pick note and also the bank loan.

The cashflow statement is also nearly complete, but is missing the cashflow entries for the pick note, and it does not yet have the financing cash flows in relation to the bank loan.

As a result of all of this, the balance sheet in this model doesn't yet balance, so let's create the entries needed to complete this model.

We're going to start with our base calculations for the pick note where we already have the ending balance from the last reported year.

This then becomes our beginning balance in our first forecast year.

We're then gonna add the interest accrued on the pick note each year.

Remember, this interest is just added to the loan balance, and then the entire balance is paid off at maturity of the note.

We'll grab our interest assumption for this from the top of the model and then multiply this by the beginning balance on the pick note.

We can then sum our base calculation to provide the ending balance on our pick note in the first forecast year.

And then we just need to copy this to the right.

Now. Let's build our base calculation for the bank loan.

As before, the ending balance for the last reported year is already provided, and this becomes our beginning balance in our first forecast year.

Unlike the pick note, we don't need to add any accrued interest as all the interest on the bank loan is cash pay, meaning that it's paid out in cash each year.

So the only adjustment in our base calculation is to add any issuance or repayment of the bank loan, and that's taken from our assumptions above. We can then sum Our base calculation to give the ending balance and then copy those calculations to the right.

The next step is to include these items in our model, and we're gonna start with the income statement.

So in the income statement, we're going to grab the interest on our pick note and include this as interest expense.

Two things to flag here.

Firstly, we need to multiply the interest by minus one to show this as interest expense in the income statement.

Secondly, the interest is calculated on the opening pick balance, so we don't need to worry about creating any circular references.

We're going to leave the other interest line blank for now as we can't complete that until we finish the cash flow statement.

Now, let's look at the balance sheet here.

We need to take the ending balance on our base calculations and include them in the balance sheet.

Long-term debt reflects the ending balance on both the pick note and the bank loan.

The next step is to make the adjustments needed in the cash flow statement.

Now the first thing we need to do is add back the pick interest to our operating cash flows as this is a non-cash item, which is included in net income.

Now let's look at our financing cash flows.

As usual, we're gonna need to include debt repayments in our financing cash flows.

However, we can't just take the change in long-term debt from our balance sheet because this includes the interest accrued on the pick note, which is non-cash.

So instead, we will grab the repayments on the bank loan from our base calculation.

Once we complete this, you should notice that our model now balances.

So we've included all of our income statement and balance sheet items in our cashflow statement.

However, the model is not yet complete as we haven't yet calculated Interest expense on the bank loan and the revolver or the interest income on the cash balance.

We're going to calculate this using average balances for each item and then include them in the income statement using a circular switch.

Since this is something that we've covered previously in our modeling materials, the rest of this video is going to be accelerated, so I suggest that you pause the video, build the calculations yourself, and then check your answer at the.