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7 Cards in this Set

  • Front
  • Back
What are traditional LBO target firms?
• long term growth is slow
• cash flows are positive
• downsizing is needed
What are 5 characteristics of post LBO firms?
1) high debt to equity ratio
2) pay-for-performance compensation
3) substantial equity ownership by managers
4) limited cross-subsidization between business units
5) substitutes compensation incentives for direct monitoring
What are two arguments for increased debt?
• replacing equity with debt bonds managers to pay out cash in the future in a way that a promise of dividends does not
• debt is a powerful change agent as it forces managers to think seriously about strategy in order to be able to generate the cash to service debt
What are 4 typical consequences of an LBO?
1) pre-buyout bondholders may lose money as a result of a downgrading of their claims on the newly leveraged company
2) operating earnings and cash flows increase
3) employment grows less quickly
4) CapEx are 20% lower than non-LBO firms
5) increases in debt can virtually eliminate LBO income tax obligations
What are 5 characteristics of post LBO firms?
1) high debt to equity ratio
2) pay-for-performance compensation
3) substantial equity ownership by managers
4) limited cross-subsidization between business units
5) substitutes compensation incentives for direct monitoring
What are two arguments for increased debt?
• replacing equity with debt bonds managers to pay out cash in the future in a way that a promise of dividends does not
• debt is a powerful change agent as it forces managers to think seriously about strategy in order to be able to generate the cash to service debt
What are 4 typical consequences of an LBO?
1) pre-buyout bondholders may lose money as a result of a downgrading of their claims on the newly leveraged company
2) operating earnings and cash flows increase
3) employment grows less quickly
4) CapEx are 20% lower than non-LBO firms
5) increases in debt can virtually eliminate LBO income tax obligations