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Goodyear LBO Quiz

Goodyear LBO Quiz - (sell several of its very poorly...

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Internal LBO Problem -- GOODYEAR The Company’s earnings were $560 million on Sales of $11.0 billion with SG&A plus DA of $10.0 billion. The Company had $5 billion in assets and $2.0 billion in liabilities – all interest-bearing @ 10 percent. The tax rate was 30 percent. There were 220 million shares outstanding. A private investment group called The Shanghai Partners and purchased 50 million shares of Goodyear’s outstanding stock, suggesting a possible takeover. In response, Management decided to (1) change the company by divesting the unprofitable lines, and to (2) re-leverage the Company to boost EPS. This involved the following events: 1. Goodyear would divest
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Unformatted text preview: (sell) several of its very poorly performing divisions. The result of this would be to reduce Sales by $1.2 billion, but also reduce SG&A & DA expenses by $1.3 billion. These divisions had asset value (at book) of $750 million. In the divestiture of these divisions, Goodyear would reduce its liabilities – all IBD - by $500 million. 2. Next, Goodyear would re-lever itself by repurchasing the Shanghai Partner’s 50 million shares of stock plus repurchasing from the public an additional 50 million shares of stock, all at $20.00 each. The funds necessary to pay for the repurchase of the 100 million shares would be from bank loans at 10 percent interest....
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