Chapter 32, Problem 1PS

Vocabulary* Define the following terms:

1. a. LBO
2. b. MBO
3. c. Spin-off
4. d. Carve-out
5. e. Asset sale
6. f. Privatization
7. g. Leveraged restructuring

Summary Introduction

To define: The LBO.

Explanation of Solution

Define LBO:

LBO is said to be leveraged buyouts in which the debt financing would be used for the purchase of a business. The stocks of the company would no longer trade in the open market if the firm goes private.

Summary Introduction

To define: The MBO.

Explanation of Solution

Define MBO:

MBO is said to be Management buyouts, which is a buyout that is commenced by the existing management.

Summary Introduction

To define: The spin-off.

Explanation of Solution

Define spin-off:

The spin-off is the new company that is created by the parent company with the part of its operations and assets. The shares in the new business would be distributed to the stockholders of the parent company.

Summary Introduction

To define: The carve-out.

Explanation of Solution

Define carve-out:

Carve-out is like a spin-off. However, in carve-out, the new business’s share will be sold in a public offering.

Summary Introduction

To define: The asset sale.

Explanation of Solution

Define asset sale:

The asset sale is said to be the sale of a specific asset rather than the sale of an entire firm.

Summary Introduction

To define: The privatization.

Explanation of Solution

Define privatization

In privatization, the government-owned business will be purchased by private investors.

Summary Introduction

To define: The leverage restructuring.

Explanation of Solution

Define leverage restructuring:

Leverage restructuring is the process of increasing the debt-equity ratio. Here, the company would increase the debt and the debt proceeds would be paid to the stockholders. Hence, it would increase the debt-equity ratio.