week7b - Parent/Subsidiary Structure Thomas Noe Overview...

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Parent/Subsidiary Structure Thomas Noe
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Overview What is a subsidiary? How does owning an asset differ from owning a subsidiary that owns the asset? Why do firms form subs? Evidence on subsidiary financing?
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Subsidiary Subsidiary: A corporation controlled and owned by another corporation, the parent Wholly owned Partially owned In general, parents are not responsible for the liabilities of subsidiary Payments of a subsidiary to its parent equity holders have the same (low) priority as dividends paid by the sub
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Subsidiary Debt Debt is issued by the subsidiary on subsidiary cash flows Sub debt is a higher priority claim than parent company debt on subsidiary assets Sub debt or may not be issued with recourse --a guarantee from parent
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Example The tale of two subs Sub star This sub has a very high marginal return on capital invested and the value of its assets is easy to assess Sub question mark : This sub has hard to value assets and the return on capital invested (thus far) has been low
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Subsidiary Debt Sub ? parent Sub creditors Parent shareholde Parent creditors Parent guarantee? (optional) Sub Sub creditors Parent guarantee?
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Subsidiary Debt Basic Questions How much should each sub borrow?
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