Are preferred stocks included in the calculation of Basic Shares Outstanding? If yes, do they have any special treatment?
Let's suppose two investors are doing LBO and putting in $125m each ($250m total) for $1b transaction ($750m debt). Once the transaction has been completed what is shareholding structure of the company? Partner A=B= $125/$1000 = 12.5% ?
In the above case, over the five year period the investors are paying off the debts and at the end of 5 years intend to sell the company. I understand that the equity value has increased since they have been paying off debt over this period. can someone put this mathematically and show the possible shareholding structure at the end of 5 years
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I'm going to take a crack at this as its been awhile since I had a technical financial problem, but here goes nothing...
1) Shares outstanding = common shares ONLY and they must have been authorized + issued + purchased. I think the only time preferred functions into an equation that involves shares outstanding is diluted EPS w/ Pref-to-Common convertibles.
2) Debt is not considered ownership and does not come w/ voting rights, etc. It is ONLY a claim on assets. Therefore once interest is paid on debt for the year they do not share in the firms profits so the answer to your question would be both investors own 50% stake in the company and thus are the only ones who see anything from Net Income.
3) It is still 50% ownership. Lets say that they end up paying off all the debt so that now the firm is 100% equity. As each part of the principal was being paid off, that was excess cash flow (FCF) from the company being paid into the Liabilities section of the balance sheet. For Example:
Assets = (Liabilities - 750m) + (Stockholders' Equity + 750m) The easiest way to think about it might be to say that the free cash flows are being paid out to the investors who are then taking it and buying a greater stake in the company by buying down the debt.
I think you might be confused about how all this works, or else I've lost all connection to a strong financial past :\
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