A particular feature of financing an LBO transaction is the incorporation of strip financing in which each investor takes a strip of senior debt, junior debt, and equity. Junior debtors who hold a simultaneous ownership of equity and debt have an incentive to postpone a bankruptcy providing the present value of the asset liquidation and earnings at the end of the second period exceeds the value of total debt obligation. This possibility of postponing bankruptcy provides the LBO firm with an extra path of operation through which it can achieve an additional value. / Two models, one for an LBO with strip financing and the other for an LBO without strip financing are built on the basis of the state-preference model to analytically prove two propositions: (1) By incorporating the strip financing into its capital structure, an LBO firm can increase its total value of the firm. (2) By implementing the strip financing, the value of debt of an LBO firm also increases. The implications of the above main results are that the total increment in firm value consists of three components: (1) The bankruptcy costs saved by the postponement of bankruptcy. (2) An additional tax shield due to debt charges and non-debt tax deduction which are created by the postponement of bankruptcy. (3) Value achieved through the continued operation which is made possible by the postponement of bankruptcy. / Source: Dissertation Abstracts International, Volume: 50-03, Section: A, page: 0760. / Major Professor: James S. Ang. / Thesis (Ph.D.)--The Florida State University, 1989.
| Identifer | oai:union.ndltd.org:fsu.edu/oai:fsu.digital.flvc.org:fsu_77964 |
| Contributors | Jung, Minje., Florida State University |
| Source Sets | Florida State University |
| Language | English |
| Detected Language | English |
| Type | Text |
| Format | 137 p. |
| Rights | On campus use only. |
| Relation | Dissertation Abstracts International |
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