A Brief Note On Financial Financing

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Ashish Jain (2013) states that, “Depending on the size of the acquisition, debt as well as equity can be provided by more than one party. In larger transactions, the bank that arranges the credit sells all or part of the debt in pieces to other banks in an attempt to diversify and hence reduce its risk. Senior debt usually has interest margins of 3–5%, and needs to be paid back over a period of 5–7 years, and junior debt has margins of 7–16%, and needs to be paid back in one payment after 7–10 years”. Leverage buyout is a very lucrative method on financial sponsoring because barely anyone ever loses; therefore it’s a win-win situation for both the acquirer and the bank. It’s a winning situation for the acquirer because they can increase their return on equity, and it’s a win situation for the bank if they financing the LBO because the interest is much higher. 3. LEVERAGE BUYOUT Leveraged buyouts (LBOs) involve use of a large amount of debt to purchase a firm. LBOs are generally used to finance management buyouts. LBOs are a clear-cut example of a financial merger undertaken to create a high-debt private corporation with improved cash flow and value. Typically, in an LBO, 90 percent or more of the purchase price is financed with debt. A large part of the borrowing is secured by the acquired firm’s assets, and the lenders, because of high risk, take a portion of the firm’s equity. Junk bonds have been routinely used to raise the large amounts of debt needed to finance LBO

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