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Principles of Finance Videos 166 videos
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Principles of Finance: Unit 5, PIK 11 Views
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Description:
PIK, or Payment in Kind, is the payment of interest or dividends using securities rather than cash. Keeps the ol' wallet from getting unwieldy.
Transcript
- 00:00
Principles of Finance a la shmoop pik.... this isn't something you do to your
- 00:08
nose hopefully in private anyway nor is it [Person picking their nose]
- 00:10
something you set on a basketball court rather PIK stands for payment in kind
- 00:16
and has nothing to do with being nice so bonds have the option the company's
- 00:21
option to instead of paying the interest or principal in cash well sometimes they
Full Transcript
- 00:26
can pay in stock and that's the in-kind part so if a company has a stock trading
- 00:31
at 20 bucks a share and owes twenty million dollars in interest payments in [Man discussing example company's stock price and interest owed]
- 00:34
a given period if it has a PIK feature or option it can choose to pay that
- 00:38
dividend in that period with a million shares of its stock is that a good idea?
- 00:43
a bad idea well think about the message it sends it essentially means
- 00:47
that the company thinks its stock is overpriced at 20 bucks a share and is [Stock price stamped overpriced]
- 00:51
choosing to dilute itself rather than pay the cash interest it owes so usually
- 00:56
not a good idea if you're an equity holder you'd imagine that the company's
- 01:00
stock would go down the day they announced that PIK option by the way so
- 01:04
and it goes down to what 18 and at 18 a share instead of that payment costing
- 01:09
them a million shares, then it cost them 20 million divided by 18....1.11
- 01:13
million shares and yes it's a vicious cycle so PIK situations have to be
- 01:18
carefully thought through or they really mess up the long-term prospects of a
- 01:23
company [Man discussing PIK situations]
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