FIN 200 Week 4 DQ 1 - 7546

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A company would want to use leverage to acquiring a company. This is called leverage buyout. In leverage buyout, company is acquired using the assets and cash flow of acquired company to finance the purchase.

Debt has low cost so cost of capital is low. Also, company does not have to put its money in buyout but the acquired firm starts creating wealth for the acquiring company.

 

One example of such leveraged buyout is Indian company Tata Tea's takeover of global tea major Tetley. This deal which was the biggest ever cross-border acquisition.

 

Leverage is recommended for firms which are:

·         In a stable industry

·         Experiencing growth

·         Finding economic condition in its favor

 

Achieving leverage means increasing Debt-to-equity ratio. There are many ways a company can achieve leverage. By taking long term and/or short term Debt Company increases leverage. Long term debt can be taken using mortgage. Short term debt is basically given on the basis of current ratio. Company can maintain current ratio acceptable and take short term loan to fund working capital. Also, by delaying payments to vendors leverage can be achieved up to some extent.

generally company achieve leverage by using project finance, syndicate loan etc.

Solution Description

A company would want to use leverage to acquiring a company. This is called leverage buyout. In leverage buyout, company is acquired using the assets and cash flow of acquired company to finance the purchase.

Debt has low cost so cost of capital is low. Also, company does not have to put its money in buyout but the acquired firm starts creating wealth for the acquiring company.