Question

13. Answer the following 3 questions for number 13.

What are the benefits accruing to a company that is traded in the public securities markets?

What are the disadvantages to being public?

How does a leveraged buyout work? What does the debt structure of the firm normally look like after a leveraged buyout? What might be done to reduce the debt?

Answer 1

Benefits accruing to a company that is traded in the public securities markets:

A publicaly traded comapny will usually have a greater ability to raise capital.

Liquidity of existing stockholders will be increased.

Ease in estate planning for existing stockholders.

It can aslo help in bank negotiations, executive recruitment and marketing of products through additional prestige and visibility

Increased capacity to engage in merger and acquisition process.

Disadvantages to being public:

All information must be made available to the public through SEC and statefilings. This can be very expensive for a small company.

Pressure is put on a firm for short term performance

Large downside movement in the stock can take place in a bear market.

The initial cost of going public can be very expensive for a small firm.

The president must be a public relations representative to the investment community.

leveraged buyout work:

A leveraged buyout (LBO) is the acquisition of another company using a significant amount of borrowed money to meet the cost of acquisition. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
After the repurchase, the company exits with a lot of debt and heavy interest expense.To reduce the debt load, assets may be sold off to generate cash. Also, returns from asset sales may be redeployed into higher return areas