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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)

$42,680,000

Cost of goods sold

$32,240,000

Gross profit

$10,440,000

Selling and administrative expenses

$4,558,000

Operating profit

$5,882,000

Interest expense

$600,000

Net income before taxes

$5,282,000

Taxes

$2,120,000

Net income

$3,162,000

Bailey corporation

Balance sheet

As of December 31, 20X1

Assets

Current assets:

Cash

$250,000

Marketable securities

$130,000

Accounts receivables

$6,000,000

Inventory

$8,300,000

Total current assets

$14,680,000

Net plant and equipment

$13,970,000

Total assets

$28,650,000

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$3,800,000

Notes payable

$3,550,000

Total current liabilities

$7,350,000

Long-term liabilities

$5,620,000

Total liabilities

$12,970,000

Stockholder’s equity:

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

$1,800,000

Capital in excess of par

$6,300,000

Retained earnings

$7,580,000

Total stockholder’s equity

$15,680,000

Total liabilities and stockholder’s equity

$28,650,000

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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