ch13 - Chapter 13 Financial Restructuring Financial Value...

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Financial Restructuring Financial Restructuring 13 13 Chapter Chapter
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Chapter 13-2 Value of the Firm Value of all equity financed firm + PV of tax shields + PV of other benefits of leverage + PV of benefits of control change + PV of benefits from changes in strategy, policy, structure, etc. PV of costs of financial distress Value of the firm
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Chapter 13-3 Leverage and Leveraged Recaps Debt can be source of funding for acquisitions Debt can discourage potential acquirers Leveraged recapitalization (LR) characteristics Large issue of debt, proceeds used to buy back shares Usually increases management ownership (9% to 24% on average) Book leverage (total debt / total capitalization) increases from 20% to 70% on average
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Chapter 13-4 Leverage and Leveraged Recaps (Example) Pre Recap 20% Debt 40% Debt Amt. of debt $0 $600 $1,200 Shares repurch. 0.00 18.52 34.48 PV tax shields $0 $240 $480 MV of firm $3,000 $3,240 $3,480 Mkt. equity $3,000 $2,640 $2,280 Shares outstand. 100.00 81.48 65.52 Share price $30.00 $32.40 $34.80
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Chapter 13-5 Leverage and Leveraged Recaps (20% Debt) Assume managers originally own 20 shares After the LR, ownership increases from 20% to 20/81.48 = 24.5% Rather than share repurchase, firm can pay cash dividends to outside shareholders and stock dividends to managers (page 331 of the text) Pay $7.5 to outside shareholders Pay 6.024 shares to managers
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Chapter 13-6 Leverage and Leveraged Recaps Market response to LR announcements Used as takeover defense – both positive and negative returns Proactive LRs: Cumulative abnormal return of about +30% Return to bondholders of +5% Subsequent performance High rate of financial distress Debt plays positive disciplinary role Success affected by: business economic conditions, achievement of operating improvements
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This note was uploaded on 05/10/2011 for the course MGT D72 taught by Professor Chau during the Spring '11 term at University of Toronto- Toronto.

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ch13 - Chapter 13 Financial Restructuring Financial Value...

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