Brealey. Myers. Allen Chapter 33 Solution

Brealey. Myers. Allen Chapter 33 Solution - CHAPTER 33...

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1 CHAPTER 33 Corporate Restructuring Answers to Practice Questions 1. a. True. Carve-out or spin-off of a division improves incentives for the division’s managers. If the businesses are independent, it is easier to measure the performance of the division’s managers. b. False. The limited life of a private-equity partnership reassures the limited partners that the cash flow will not be reinvested in a wasteful manner. It also tends to ensure that partnerships focus on opportunities to reorganize poorly performing businesses and to provide them with new management before selling them off. c. True. The remuneration package for the general partners typically includes a 20% carried interest. This is equivalent to a call option on the partnership’s value and, as is the case for all options, this option is more valuable when the value of the assets is highly variable. 2. In general, firms with narrow margins in highly competitive environments are not good candidates for an LBO or an MBO. These firms are often highly efficient and do not have excess assets or unnecessary capital expenditures. Further, the thinness of the margins limits the amount of debt capacity. 3. RJR issued a lot of debt and repurchased shares to reduce the equity base. Sealed Air issued a lot of debt and paid a special dividend to all shareholders to reduce the equity base. RJR was seen as a company that needed to streamline operations and reexamine its capital expenditures and asset holdings. The firm was in a highly competitive environment, but had the advantage of brand name recognition for its products. Sealed Air needed to streamline its operations because it had grown inefficient due to the patent protection it had for its
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This note was uploaded on 04/18/2010 for the course FINANCE 936116531 taught by Professor Wuyiling during the Spring '10 term at Nashville State Community College.

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Brealey. Myers. Allen Chapter 33 Solution - CHAPTER 33...

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