Lect 14 221 web

Lect 14 221 web - Managerial Finance Lecture 14 Sealed Air...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Managerial Finance Lecture 14 Sealed Ai Sealed Air Class 13. Summary Debt financing affects value because it affects cash flows : Debt financing can increase the net-of-tax cash flows • Reduce tax liabilities relative to an all-equity financed firm High levels of debt financing can decrease FCFs: direct and indirect costs of financial distress Trade-off theory of capital structure . Firms choose an optimal level of debt financing that balances: 1. The tax benefit of using debt financing against 2. The costs of financial distress Valuation methods to capture the effect of debt tax shields on firm value: 2 WACC : discount FCFs using the after-tax WACC Adjusted Present Value (APV). Two steps: 1. Value the project as if it were all-equity financed: FCFs and all-equity cost of capital (pre-tax) 2. Add the present value of the tax shield of debt: using the expected interest tax shield and the tax shield cost of capital
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Sealed Air: A Leveraged Recapitalization Main elements: Borrow $307 million Debt Deb • $137m secured bank credit agreement • $170m subordinated notes Pay special dividend Total payout of $330 million • Exceeds book value of equity • Almost 90% of the prior market value of equity Equity Equity Debt 3 Questions: Why did Sealed Air undertake a leveraged recap? Was it a good idea? For whom? How much value was created? Where did it come from? What was the impact of the transaction on investors? Was the transaction successful? Some Background Sealed Air’s Changing Competitive Environment What were Sealed Air’s margins? How efficient were its operations? Why did Sealed Air’s managers have a renewed interest in manufacturing? What were they attempting to do about it? 4 Before, we seldom thought of manufacturing as an important source of new ideas. .. We implemented a suggestions system. I was skeptical about this, now I love it. Even though the employees only win $25 for a top suggestion, the ideas were shockingly good…
Background image of page 2
3 Why Increase Leverage? Could they support more leverage? Dunphy expected to double Sealed Air’s $54 million in available cash over the next year and a half (p 4) the next year and a half (p.4) • $54 / 1.5 = $36m/yr, $36m / 12% = $300 million Why not invest the cash? There were no good acquisitions and we had nothing to do with the cash. Just increasing the dividends over the years is admitting defeat. We don't want to be a public utility. (Cruikshank, p.4) Shareholders are not paying me to invest their money in securities…Once 5 a manager starts worrying about what securities the firm is holding, it's time to give the money back to shareholders. (Dunphy, p.4) What direct benefits would an increase in leverage provide ?
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/08/2012 for the course MS&E 245G taught by Professor Perez-gonzalas during the Fall '11 term at Stanford.

Page1 / 10

Lect 14 221 web - Managerial Finance Lecture 14 Sealed Air...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online