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7 Cards in this Set
- Front
- Back
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What are traditional LBO target firms?
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• long term growth is slow
• cash flows are positive • downsizing is needed |
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What are 5 characteristics of post LBO firms?
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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 |
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What are two arguments for increased debt?
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• 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 |
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What are 4 typical consequences of an LBO?
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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 |
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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 |
