I know BIWS' 400 questions like the back of my hand, but I keep getting asked these hard questions which I don't know how to answer. What level of finance even is this?
Company A
Company B
Company C - 1,000 million value
Company A owns 60% of Company C
Company B owns 40% of Company C
Company A want to increase its share from 60% to 75% by buy buying shares from Company B.
Company C is going to raise debt.
How much debt does Company C have to raise for Company A to increase its share from 60% to 75%?
Maybe this is how it works-
Company B stays at 400 units
Company A wants 75% or 3/4 ownership
400 is 25% of what number.
Couldn’t be. First off, OP says A wants to increase ownership by buying shares from B. Second, raising the debt wouldn’t directly impact equity ownership of C, so finding 1600 (.25 of it is 400) will give us our EV and thus, once again, won’t alter equity ownership.
Could it be a trick question? Changing the capital structure by raising more debt shouldn’t have an effect on the equity component.
The question you wrote is nonsense; you recalled it incorrectly
C is debt financing a share buyback from B. Assuming for a second it's possible to do so (normally you have to buy back all shareholders pro-rata but let's say A is ok with it) then if $1,000 is the equity value of C, C raises $200 and buys back 200 shares from B (assuming 1,000 NOSH, each share is worth 1). So B had 400 shares and now has 200, A still has 600 for a total of 800 hence A owns now 75% of the equity.Just to check it works, assume C raises $400 to buy back the whole of B, then A would end up owning 100% of the company (which however now has $400 debt: though it looks like for like, it's not as the DCF of the new company will be lower hence share price should trade down).
Thank you for your response.This is assuming Company C is buying back shares from Company B, but what if Company A is simply buying shares from Company B?
This is my thought process:
Company C's debt is split proportionally between Company A and Company B based on % ownership.
Company C has to raise a total of 250
Company A gets 150 debt (60% of 250)
Company B gets 100 debt (40% of 250)
Company A now has 150 to buy shares from Company B, which would increase Company A's shares from 600 to 750 (75%).
Company A's debt +150
Company B's debt +100
Please comment.
What does it mean to “proportionally split debt”? There must be a 3rd party lender coming in for the 250m. I think what you mean is C raises 250m debt and distributes the proceeds as dividend to both A and B pro-rata (150m/100m) (ie C does a divi recap). Instead of pocketing the 150m, A used the 150m to buy shares from B therefore ultimately owning 75% of C (which now has 250m of debt though, so A owns 75%*(1,000m-250m)=56m vs 60m before).
Just to be clear, I'm not sure my thinking is correct, I'm just sharing my thought process.
If Company C raises debt, do the parent companies not own the debt proportionally to their ownership? So, If Company A owns 60% of Company C, and if Company C raises 100 in debt, Company A owns 60 in debt.
Please explain.
Doesn't debt NOT dilute equity ownership?
1. Company A receives 150 from Company C
2. Company A buys 150 shares from Company B, increasing its shares to 750 and ownership to 75%
3. Company C's value equity value lowers by 250 because of debt (if I understood your take correctly), totaling 750 (1,000 - 250)
4. Company A's and Company B's combined shares are 1,000, but Company C's equity value is 750, how is this possible? How did Company A's shares lower from 750 to 563 to maintain 75% ownership?
Nostrum animi tenetur placeat quia soluta. Ipsa ea rerum corporis quidem voluptatem sequi sed. Sit accusantium atque enim quia labore nobis est. Et blanditiis maiores sunt.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...