Anatomy of a Leveraged Buyout - NYU Stern School of Business

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A basic proposition about debt and value For debt to affect value, there have to be tangible benefits and costs associated with using debt instead of equity. • If the benefits exceed the costs, there will be a gain in value to equity investors from the use of debt. • If the benefits exactly offset the costs, debt will not affect value • If the benefits are less than the costs, increasing debt will lower value Aswath Damodaran 8
1. Tax Benefit: Debt: The Basic Trade Off Advantages of Borrowing Disadvantages of Borrowing Higher tax rates --> Higher tax benefit 2. Added Discipline: Greater the separation between managers and stockholders --> Greater the benefit 1. Bankruptcy Cost: Higher business risk --> Higher Cost 2. Agency Cost: Greater the separation between stockholders & lenders --> Higher Cost 3. Loss of Future Financing Flexibility: Greater the uncertainty about future financing needs --> Higher Cost Aswath Damodaran 9
Page 1 and 2: Anatomy of a Leveraged Buyout: Leve
Page 3 and 4: One Example: The Harman Deal Pre-de
Page 5 and 6: I. Value and Leverage Aswath Damoda
Page 7: The fundamental question: Does the
Page 11 and 12: The Miller-Modigliani Theorem In a
Page 13 and 14: Tools for assessing the effects of
Page 15 and 16: How the debt trade off manifests it
Page 17 and 18: Harman : Working out the mechanics.
Page 19 and 20: Limitations of the Cost of Capital
Page 21 and 22: Estimating the Distress Effect- Har
Page 23 and 24: c. The APV Approach to Optimal Capi
Page 25 and 26: Harman: APV at Debt Ratios Based up
Page 27 and 28: The macro environment has a relativ
Page 29 and 30: II. The Value of Control Aswath Dam
Page 31 and 32: What is the value of control? The
Page 33 and 34: Reinvestment Rate 42.00% Current Ca
Page 35 and 36: Reinvestment Rate 70.00% Current Ca
Page 37 and 38: Implications for the control premiu
Page 39 and 40: III. The Public/ Private Transition
Page 41 and 42: Perceived Risk: Private versus Publ
Page 43 and 44: Why go private? Agency issues: The
Page 45 and 46: Good candidates for going private..
Page 47 and 48: Leverage and Control The good: A f
Page 49 and 50: Leverage and Going Private The Goo

Anatomy of a Leveraged Buyout - NYU Stern School of Business

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