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
Q. Which are the allowances are exempted from the income tax? Ans: 1. Uniform Allowance and Sumptuary Allowance 2. Death cum Retirement gratuity received by Government

should be on 2012 forms and done in pencil. It should include a schedule that shows the fiduciary income calculation and other relevant calculations. Jack Green established the Jac


Loni Company paid $ 527,000 for tangible personalty in 2011 and elected to expense $ 500,000 of the cost (the limited dollar amount for 2011). Loni's taxable income before a Sectio

Bass River Furniture operates a manufacturing business in Bass River, Nova Scotia. On June 8, 2010, Bass River purchased an asset for an invoice price before HST of $1,800,000.  Th

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

Carol is a successful physician who owns 100% of her incorporated medical practice. She and her husband, Jared, are considering the purchase of a commercial office building located

Critically Evaluate overseas experiences with this form of tax. (e.g. UK or Australia)

It is a tax based on the assessed value of personal property or real estate. Ad valorem taxes can be property taxes or even duty that is levied on imported items. Property ad valor

Macy had a lot of medical expenses this year that were not covered by her insurance (either due to a deductible, co-insurance, or co-pay). Her un-reimbursed qualifying medical expe