Question

(1) What are some of the reasons for the high levels of corporate debt observed today?

(2) What is a Leveraged Buyout (LBO)? What role does debt play in an LBO?

(3) Why is the current crisis particularly difficult for firms with large amounts of debt?

Answer 1

1.Corporate debt has been growing since recovery from recession.

Following are the reason for the high levels of corporate debt observed today,

A.Due to growth of economy- the major reason for the high levels of corporate debt is arises due to economy has grown over time.After recession period the ecnomy of most of country take a big growth.

B.Company prefer debt to finance their operation.

C.Due to ratio of corporate debt and GDP is increases.

D.Coporate debt is used for repurchase outstanding equities,so the corporate debt is high.

2.A leveraged buyout, means the process of purchasing  another company bu using money raised from outside source such as bonds,loan and form other sources rater than corporate earning.

In otjer words  leveraged buyout (LBO) is a transaction where a company acurire another company by using debt as consideration.

Debt play vital role in leveraged buyout because in LBO, the debt-to-equity ratio on acquisition normally 70 to 30% or 90 to 100%..That means 70 to 90% fund arises from debt and 10 to 30% from equity.to purchase other company.

3.Due to current crisis firms has difficult to pay large amounts of debt,following reason:

a.Due to financial distress-Financial distress is a condition when an individual or company does not able to earn revnue becuse unable to meet their financial obligations.The major reason for financial distress is decrease in liquid assets,increase in fixed cost and downwad of economy.

b..Due to less Return on investment-Due to high level of competition sale of the most of company decreases so its tough for compant to pay their debt when the return on investment on downward.