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2 Jan 2018

How does a leveraged buyout work? What does the debt structure of the firm normally look like after a leveraged buyout? What might be done to reduce the debt?

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Reid Wolff
Reid WolffLv2
2 Jan 2018
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Related questions

You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company.​ UnderWater's stock price is $23

and it has 1.25 million shares outstanding.You believe that if you buy the company and replace its​ management, its value will increase by 37%.

You are planning on doing a leveraged buyout of UnderWater and will offer $28.75

per share for control of the company.

a. Assuming you get 50%

​control, what will happen to the price of​ non-tendered shares?

b. Given the answer in part

​(a​),

will shareholders tender their​ shares, not tender their​ shares, or be​ indifferent?

c. What will your gain from the transaction​ be?

1. An employee stock ownership plan (ESOP) is a trust that (2 points) A. can be used as alternative to a divestiture. B. can be used to purchase the shares of the owners of a privately held firm in a leveraged buyout. C. can be used as a means of placing a firm’s stock in “friendly” hands to help dissuade an unwanted takeover attempt. D. all of the above. Explain.

An all-equity financed company has a cost of capital of 12 percent. It owns only one project with a an economic life of 5 years. The project is expected to be abandoned at the end of its economically useful life. The project is capable of generating $200 million in free cash flow every year for five years, at which time it will be abandoned with zero liquidation value. A buyout firm proposes to purchase the company for $800 million financed with $700 million in debt to be repaid in five, equal, end-of year payments and carrying an interest rate of 5%. A. Ignoring taxes, estimate the rate of return to the buyout firm on the acquisition after debt service. B. Assuming the company’s cost of capital is 10 percent, does the buyout look attractive? Why, or why not

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