Module IV· Cash SweepIntermediate
Question
What happens in the model if the cash sweep is so aggressive that all debt is repaid before exit?
Answer
Mechanics
When total debt = 0, the sweep stops working — excess cash then accumulates on the balance sheet.
Deep diveShow more details
Example
| Year | Debt Year-Begin | CFADR | Sweep | Debt Year-End | Cash Year-End |
|---|---|---|---|---|---|
| 1 | 200 | 30 | 22 | 178 | 8 (= Min Cash) |
| 2 | 178 | 35 | 26 | 152 | 8 |
| 3 | 152 | 40 | 30 | 122 | 8 |
| 4 | 122 | 45 | 34 | 88 | 8 |
| 5 | 88 | 50 | 50 | 38 | 8 |
| 6 | 38 | 55 | 38 | 0 | 25 (accumulated) |
| 7 | 0 | 60 | 0 | 0 | 85 (accumulated) |
Impact on IRR
- Excess cash on the balance sheet reduces net debt → raises equity value at exit
- But: cash earns no return (or only a low money-market yield)
- More efficient would be: a recap dividend or a bolt-on — cash back to the sponsor or put to productive use
Common pitfalls
The model shows 0 debt but the sweep formula keeps trying to repay → bug. Fix: a MAX(0, Debt − Sweep) formula.
Pitch tip
Question: "What do you do with the accumulated cash?"
Answer: "A recap dividend after Year 5 — the sponsor pulls out excess cash via a dividend and keeps equity-value optionality on the remaining business. Senior bankers expect this answer"