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Foundations Of Financial Management
Found in: Page 493
Foundations Of Financial Management

Foundations Of Financial Management

Book edition 16th
Author(s) Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Pages 768 pages
ISBN 9781259277160

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Short Answer

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?

Leveraged buyout works through borrowing cash needed for repurchasing shares.

After the leveraged buyout, the company faces a heavy debt load, and management sells some assets to reduce such a burden.

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Step by Step Solution

Leveraged buyout

Leveraged buyout refers to the acquisition of shares of the company by borrowing funds. Either the company’s management or other investor groups repurchase all shares of the company.

Impact on debt structure

The debt structure of a company after a leveraged buyout looks like substantially under heavy debts and interest expenses.

Reduction of debt

In the case of heavy debts, the company's management requires selling the assets to reduce the heavy load of debts and should restructure its capital through corporate restructuring.

Most popular questions for Business-studies Textbooks

Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:

Bailey corporation

Income statement

For the year 20X1

Sales (all on credit)


Cost of goods sold


Gross profit


Selling and administrative expenses


Operating profit


Interest expense


Net income before taxes




Net income


Bailey corporation

Balance sheet

As of December 31, 20X1


Current assets:



Marketable securities


Accounts receivables




Total current assets


Net plant and equipment


Total assets


Liabilities and stockholders’ equity

Current liabilities:

Accounts payable


Notes payable


Total current liabilities


Long-term liabilities


Total liabilities


Stockholder’s equity:

Common stock (1,800,000 shares at $1 par)


Capital in excess of par


Retained earnings


Total stockholder’s equity


Total liabilities and stockholder’s equity


c. What return must the corporation earn on the net proceeds to equal the earnings per share before the offering? How does this compare with current return on the total assets on the balance sheet?


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