Explain the motivations behind debt covenants, Taxation

Explain the motivations behind debt covenants:

You are engineering a Leveraged-Buy-Out (LBO) of ACME Industries, an industrial bottle maker. After the LBO, the firm will be financed with 90% debt and 10% equity. Fred Farber, the CEO, will own 30% of the shares. Fred thinks that the proposed capital structure is too highly levered and points out that, in the first few years, the firm will not be able to use all its debt tax shields. Initially, the interest payments are $400m per year and EBIT is only $300m per year. However, EBIT is projected to increase 20% per year for the next five years. Provide Fred a true tax argument that supports the high level of debt. Take into account his personal taxes as well as corporate taxes. Does your tax argument depend on whether Fred wants to dilute his ownership of the company in the future?
 
b. Explain the motivations behind debt covenants? Mention at least three typical provisions in the debt covenants and how it achieves its objective?

c. Debt is always cheaper than equity. How would you respond to this comment?

Posted Date: 2/12/2013 2:44:29 AM | Location : United States







Related Discussions:- Explain the motivations behind debt covenants, Assignment Help, Ask Question on Explain the motivations behind debt covenants, Get Answer, Expert's Help, Explain the motivations behind debt covenants Discussions

Write discussion on Explain the motivations behind debt covenants
Your posts are moderated
Related Questions
Ask question #Minimum 100 words ac5) ABLE, inc. and The CAPITAL Corporation form a general partnership. Capital provides 90% of the cash. Able provides 100% or the partnerships man

Roberta Santos age 41

Q. What do you mean by Arbitration? Ans: Arbitration is a device for setting up difference between the Railway Administration and contractor by intervention of third person

BBQ Beach corporation manufactures inflatable air-matresses and life jackets for summer fun. the firm is considering replacement of their existing production line (CCA Class 8, d=2

Miguel receives tangible personal property as an inheritance in 2011. The property was depreciated by the deceased (Miguel's father), and Miguel will also depreciate it. At the dat

28) Explain how Treasury Department Circular 230 differs from the AICPA’s Statements on Standards for Tax Services.

Describe how your  firm creates value: Q: a. Dividends are tangible. Unrecognized capital gain is paper money. So, Dividends are always preferable to no payouts by the firm. Di

c program to input the salary and output payable tax using the following information salary tax 10,000-20,000 2% 20,000-35,000 4% 3

Amy R. and David T. Smith are married and live at 123 Main Street, Stafford, VA 22554. Dave is self-employed as a web developer and Amy is a commercial refrigeration sales represen

The XYZ Corporation has total earnings of $20 million and decides to pay its stockholders a dividend of $8 million. If the corporate tax rate is 30% and the personal tax rate on in