PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 32, Problem 12PS
Leveraged buyouts The Sealed Air leveraged restructuring is described in the Chapter 18 Beyond the Page feature. Outline the similarities and differences between the RJR Nabisco LBO and the Sealed Air restructuring. Were the economic motives the same? Were the results the same? Do you think it was an advantage for Sealed Air to remain a public company?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Leveraged or management buyouts (LBO/MBO) often are financed with 75% or 80% debt. The rest of the purchase is financed by the private equity firm and the new management team. The company is taken private, so the stock is no longer traded on any stock exchange. Once private the new owners usually sell assets to repay some of the debt. Good buyout candidates have strong stable cash flow and limited growth opportunities. Initially most of the company’s cash flow goes to debt reduction. Buyout firms often have a portfolio of dozens of companies, so each company is being added to a diversified portfolio.
Buyout firms have very high required rates of return, 30% to 40%. If the average asset beta (that is the average beta of an unlevered firm) is about 0.75, can you explain the high hurdle rate buyout firms apply to their deals? Suppose the historic risk-free rate is about 5% and the historic market risk premium is 7.4%
Suppose a buyout company just picked rate – say 32% - what sort…
What are disadvantages for a company to go public by issuing equity in an initial public offering (IPO)?
Question 16 options:
a)
It reduces information asymmetry for competitors
b)
Class action lawsuits can occur following large stock price drops
c)
It can attract analyst following resulting in myopic decisions
d)
All of the above are disadvantages of an IPO
e)
None of the above are disadvantages of an IPO
Which one of the following is probably the most effective means of increasing investors' interest in an IPO?
Multiple Choice
Extending the lockup period
Issuing the IPO through a rights offering
Underpricing the IPO
Eliminating the quiet period
Eliminating the Green Shoe option
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Compensatory Share Option Plan Tom Twitlet, president of Twitlet Corporation, is considering establishing a compensatory share option plan for the companys 20 top executives. Tom wants to set the terms of the plan so that the number of options the executives can exercise increases based on a specified increase in the companys future earnings. Tom wants to make sure that the plan cannot be manipulated but, in addition, it should properly motivate the executives to stay with the company and make it successful. Given this concern, he wants to know how the increase in earnings should be specified: Should it be a dollar amount or a percentage change, and should the change in earnings be compared to the companys past results or against industry results? He also is interested in understanding how to determine the service period of the plan. Finally, Tom wants to understand the accounting for the plan and how it will affect the companys financial statements. Required: Prepare a memo to Tom that briefly explains the issues involved in specifying the terms used in the plan and accounting for the terms of this type of compensatory share option plan.arrow_forwardFinance Companies A and B are each considering an unanticipated new investment opportunity that will marginally increase the value of the company and will also increase the company’s level of diversication. Company A is unlevered, and company B has a capital structure of 50% debt. Assume that the shareholders control the company, which one of the following statements is correct. a) Since NPV of the investment is positive both company A and B will accept the project. b) Since the project only marginally increase company values but decreases return variance of the company’s assets both companies will reject the project. c) It is more obvious that Company B invests since for levered company the diversication benefits are more important. d) None of the given alternative.arrow_forwardThe directors of Company XYZ wishes to make a big investment into a new project which will be financed by means of a rights issue. The directors expect the share price will decrease to values even lower than the theoretical ex-rights price. Explain the factors that would influence the share price after the rights issue.arrow_forward
- Regarding the EPS fallacy, which of the following statements is correct: a. When a company issues debt and uses all the proceeds to buy back equity and as a result EPS rises, the fact that some analysts associate the rise of EPS to an improvement in the company's performance is called the EPS fallacy. b. All given statements are correct. c. One of the reasons behind the EPS fallacy is not to take into account that when EPS rises mechanically due to a leveraged recapitalisation, the cost of equity also rises in the same proportion and the share price does not change (assume no taxes and perfect capital markets world). d. Suppose companies A and B have identical cash flows but different capital structures. Suppose further that EPS(A) > EPS(B). We cannot conclude that A has a better performance than B.arrow_forwardPlease explain if a company has already taken too much debt (exceeded the amount that they can borrow) but has strong equity value, can this company be a leverage buyout (LBO) target? Please reply. Thanks.arrow_forwardWhich is NOT an IPO puzzle? Huge price spikes in the first couple trading days Underperformance in the long run Extreme IPO market cycles Hiring underwriters to do the jobarrow_forward
- Assume a Modigliani and Miller economy. Company XYZ is currently financed only withequity. The management of the company hires a consultant. The consultant makes thefollowing suggestion: “My advice for XYZ is to issue debt and use it to repurchase some ofthe company’s equity. This would allow XYZ to get the benefit of a low cost of capital ofdebt without raising its cost of capital of equity.”Discuss in detail the statement of the consultant.arrow_forwardWhich of the following is most likely an advantage of an accelerated share repurchase (ASR) program over an open market share repurchase (OMR) program? Question options: a) ASRs allow a company to provide longer periods of stock price support versus an OMR. b) ASRs send a stronger signal to markets when disclosed versus OMRs. c) ASRs are taxed at the capital gains tax rate, which can be lower than the ordinary income tax rate on OMRs. d) ASRs are more flexible than OMRs.arrow_forwardSuppose company A is 100% equity and goes through a leverage recapitalisation operation, i.e., it issues debt and all the proceeds from debt are used to buy back equity. Select all correct answers below (multiple correct answers are possible). a. In a perfect capital markets world with taxes, the share price increases with the leverage recapitalisation operation. b. In a perfect capital markets world without taxes, WACC is the same before and after the leverage recapitalisation operation. c. In a perfect capital markets world without taxes, we can be 100% sure the cost of debt is the same before and after the leverage recapitalisation operation. d. In a perfect capital markets world without taxes, the cost of equity is the same before and after the leverage recapitalisation operation. e. In a perfect capital markets world with taxes, the share price decreases with the leverage recapitalisation operation.arrow_forward
- The form of corporate restructuring in which a small group of investors raises loan financing to purchase all the equity shares of a public company is called Select one: a. a privatization. b. a leveraged buyout. c. an indenture. d. a debenture. e. a reorganization.arrow_forwardInvestment bankers argue that "pop" at an IPO is great for the company. "Pop" occurs when the stock price jumps following the IPO. Investment bankers contend this is an expression of strong interest in the company's stock and is in effect free PR for the company. Evaluate this argument.arrow_forwardDye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 51.5% debt (wd) by issuing bonds and using the proceeds to repurchase and retire some common shares so the percentage of common equity in the capital structure (wc) = 1 – wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity, i.e., what is rL - rU? Do not round your intermediate calculations. Risk-free rate, rRF 5.00% Tax rate, T 25% Market risk prem, RPM 4.00% Current wd 0% Current beta, bU 1.20 Target wd 51.5% 4.78% 3.06% 4.40% 3.63% 3.82%arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
Fundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning
Fundamentals Of Financial Management, Concise Edi...
Finance
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Financial Accounting: The Impact on Decision Make...
Accounting
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Cengage Learning
Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY