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venture final exam with 100% correct answers
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venture final exam with 100% correct answers
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venture final examdivestitures- tax free spinoff - correct answer ✔✔subsidiary being spun off is given to company's existing
SH, each SH gets a share of the new company and keeps shares of existing parent, can choose whether
to hold onto new stock or sell it
divestiture- subsidiary IPO - correct answer ✔✔shares of sub are sold to public through IPO, sub
becomes public company with parent still owning large % of its shares but not 100%, often done when
market is overvaluing businesses in certain industry or country
leveraged buyout - correct answer ✔✔LBO is a business acquired by an equity sponsor, business being
acquired can be public, private, sub, division of company
equity sponsor financed most acquisition w/ debt- any debt used is secured by assets of company that is
being bought (not by equity sponsor)
LBO- public company - correct answer ✔✔deal must be approved by existing SH, usually all or almost all
of existing SH are acquired in LBO, usually friendly takeover
after LBO completed, company becomes private company, most of its equity is usually owned by ES,
management also owns small % of equity
equity sponsors (financial sponsors, private equity firms, LBO firms) - correct answer ✔✔business is
providing equity to invest in LBOs, equity comes from funds that they raise using investor's capital,
investors= wealthy families, pension funds, endowments, sovereign funds, ES usually serves on board
but lets MGT run company, usually try to cash out in under 5years
capital structure of LBO- senior secured bank debt - correct answer ✔✔secured by company's assets
(AR, inventory, PPE, intangibles), lowest cost of capital- want as much as possible
capital structure LBO- unsecured debt - correct answer ✔✔senior unsecured bonds, subordinated bonds
(senior subordinated, subordinated, junior sub)
, highest cost debt, because most junior and most risky
capital structure LBO- equity - correct answer ✔✔usually 15-35% of total capital, the lower equity %,
higher ROE, equity sponsor provides most of the equity- desire return greater 20%, MGT usually buys
some equity at favorable terms- get highest IRR if LBO successful
ways to increase equity value in an LBO - correct answer ✔✔growing EBITDA
-grow sales
-cost cutting- most common strategy, headcount reductions (layoff), facility consolidations
-sale of excess assets to pay down debt
-acquisition smaller business for synergies
ways for equity sponsor to cash out - correct answer ✔✔initial public equity offering
sale of all or part company
break up company and sell in pieces
how to maximize the sponsors IRR on equity - correct answer ✔✔grow EBITDA
pay down debt
doe these as quickly as possible and cash out
capital required for acquisition - correct answer ✔✔purchase price + fees
proceeds to common equity at exit - correct answer ✔✔sales price- fees - debt - preferred + excess cash
IRR of equity sponsor (same as annualized ROE) - correct answer ✔✔(proceeds of CE at exit)/(initial
equity invest)^(1/yrs)-1
what makes a company a good LBO target - correct answer ✔✔business easy to understand
predictable cash flows
increasing cash flows
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