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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.

Language:
English Language

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

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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