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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?
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Hi, I need help with a timed quiz based on principles of business taxation 2013 edition . it is 25 short questions in 3 hours.
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How to raise an invoice with WCT for Civil construction job in Andar pradesh
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
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which type of tax, direct or indirect is applicable in any country (example underdeveloped countries)? Why? Show your critical areas and weaknesses.
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