Problem . You are the CEO of a leveraged buyout firm and are evaluating a potent

Question

Problem . You are the CEO of a leveraged buyout firm and are evaluating a potential buyout of BAD Company. BAD's stock price is S20, and it has 2 million shares outstanding. The company currently has no debt, nor does it have any cash. You believe that if you buy the company and replace its management, its total (enterprise) value will increase by 40%. You are planning on doing a leveraged buyout of BAD (ie, through borrowing money/using debt), and will offer $25 per share for control of the company Assuming you succeed and get 50% control (ie. you bought 50% of all the shares outstanding at a price of $25 per share by borrowing the necessary amount of money), what is the equity value of the company BAD after the leveraged buyout? [After the leveraged buyout, you took the debt (ie. the money you borrowed for the buyout) onto the company BAD's balance sheet.]

Explanation / Answer

Sol. So 50% of equity with $25/share= 25 * 1 million shares= $25 million

so the debt on company= The cost of buying =$25 million

So the enterprise value of the company after the leveraged buyout= ( 1+ 40%)( market value of equity + market value of debt)= (1.4)( 20*2 + 25*1)= $91 million

so equity value of BAD after leveraged buyout= Entreprise value - debt= 91-25=$66 million

so equity value/share= $66 million/ 20 million= $33

Note: Assuming that the 40% increase in Entreprise value is after the debt is put on the Balace sheet of the firm.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.