View the step-by-step solution to:

Question

KEY INFORMATION:

ClydeCo has an annual net operating income of $1,500,000, 99,000 shares of

stock outstanding, and no debt. ClydeCo pays federal income tax of $510,000 ($1.5 million multiplied by 34 percent), resulting in net after-tax income of $990,000 ($1.5 million less $510,000). Earnings per share are $10 ($990,000 divided by 99,000 shares). The stock sells on the market at about $80 per share (or 8 times earnings).


Donor Co tenders and acquires all the outstanding ClydeCo stock for $120 cash per share (50% more than the market price) for a total price of $11.88 million. Donor Co puts up $880,000 of its own funds and raises the remaining $11 million by issuing balloon notes by paying 12 percent interest only for 10 years, to be assumed by ClydeCo. The annual net operating income of ClydeCo after the buyout is unchanged, with the exception of debt services and taxes.

 

REQUIRED:

Complete the following chart showing the distribution of ownership of ClydeCo's operating income before and after the leveraged buyout, using a 34 percent corporate tax rate:


Before After

 

 

ClydeCo's original shareholders $ 990,000 -0-

 

 

Bondholders -0- $_______

 

 

DonnorCo -0- $_______

 

 

Corporate income taxes $ 510,000 $_______

 

 

Total operating income $1,500,000 $1,500,000


Who is benefitted from this transaction: the public sector or the private sector?

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Let our 24/7 Tax law tutors help you get unstuck! Ask your first question.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors