How do you compute exit cash flow in a sale including debt payoff?

• A. Proceeds = sale price minus selling costs; distribute to debt payoffs and remaining to equity according to waterfall.
• B. Proceeds go entirely to equity.
• C. Debt payoff first, then equity.
• D. Sale price is the same as original purchase.

Answer: (A)

The main idea is that exit cash flow is built from net sale proceeds after selling costs, then distributed in a debt-first, equity-residual order defined by the waterfall. Start with sale price minus selling costs to get net proceeds. Those net proceeds are used to pay off any outstanding debt first. Only after the debt is fully satisfied does the remaining amount go to the equity investors according to the waterfall, which may include preferred returns and catch-up provisions before the sponsor receives any promote. This approach ensures lenders recover their capital before equity receives distributions. If the net proceeds are not enough to cover the debt, the equity typically gets nothing and the lenders receive what is available. For example, if the sale price is 10,000 and selling costs are 500, net proceeds are 9,500; if there is 6,000 of debt, that is paid off, leaving 3,500 to be split to equity per the waterfall. The other options omit the necessary netting of selling costs or the priority of debt repayment, which is why they don’t reflect how exit cash flow is actually computed.