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Chapter 5: 10DQ (page 493)

How might a leveraged buyout eventually lead to high returns for a company?

Short Answer

Expert verified

In a leveraged buyout, the company sells assets and reduces its debts. Further, the products are sold, and redeployment of assets takes place which leads to a high return for a company.

Step by step solution

01

Leveraged buyout

A leveraged buyout is a process of repurchasing all the company's shares by the management or other investors through borrowing the required cash.

02

Positive impact of leveraged buyout

After a leveraged buyout, the company’s management sells assets to reduce the debt load. A decrease in debts improves the view of financial statements.

Further the company’s divisions sell products assets redeployed into newhigh-return assets.

In such a manner, leveraged buyout leads to a high return for a company.

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Most popular questions from this chapter

The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of \(6,910,000 in the current year. The company is considering the issuance of 1 million additional shares that can only be issued at \)30 per share.

a. Assume that Hamilton Corporation Company can earn 7.0 percent on the proceeds. Calculate the earnings per share.

b. Should the new issue be undertaken based on earnings per share?

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

c. Compute the earnings per share immediately after the stock issue.

What are some specific features of bond agreements? (LO16-1)

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.

Tiger Golf Supplies has $25 million in earnings with 7 million shares outstanding. Its investment banker thinks the stock should trade at a P/E ratio of 31. Assume there is an underwriting spread of 7.8 percent. What should the price to the public be?
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