See: Leveraged Buyout. See: Management Buyout.
The purse company was failing. It had once had a prestigious brand among shopping afficionados. But the company grew arrogant. It drew back splits with retailers, and eventually the retailers rebelled. So the company, which used to trade at 12 times cash flow, now trades at 6 times, because its revenues are flat at best. And it is fading in relevance.
Time for the LBO/Private Equity vultures to come around.
The typical structure: they borrow a ton of money, buy the company, fix it, and hope that, when it comes public again, it has much better future prospects than it does today. A huge delimiter in how much that private equity shop can pay for the firm revolves around the interest expense it will incur in borrowing the money, which will then be used to buy the purse company. With half a billion dollars borrowed, even a difference of 1% comprises a cost difference of 5 million bucks a year. So the IIE is a big fat hairy deal when bidders do their calculations for what they can or can not pay.
Related or Semi-related Video
Finance: What is Imputed Interest Rate?1 Views
Finance allah shmoop What is imputed interest rate Imputed guest
at or presumed based on x y and z that's
the foundation of an imputed interest rate and its chief
cheerleader Yep It's the i r s the tax people
those guys you just love to hear from Why Well
because taxes need to be collected Right We have pork
to buy for politicians Come on people Get with it
So we have a zero coupon bond here We bought
for five hundred bucks which comes do or pays off
in ten years for a thousand dollars on lee Remember
Zero coupon bonds don't pay any interest along the way
They just pay a one time end of period amount
which includes interest and principal The irs taxes Bondholders imputed
interest Yes like gains based on whatever interest rate is
imputed by the terms of the deal So in this
case remember that rule of seventy two thing so many
years to doubled about it into seventy two and all
that Yeah So in this case the money takes ten
years to double that's ten into seventy two paying seven
point two percent interest per year Compound it So the
irs would take as an imputed interest Five hundred box
times seven point two which is thirty six dollars of
taxable imputed interest games And they would take that each
year and you'd pay that each year on your taxes
So if you owned this bond and we're living in
a forty percent marginal tax bracket blue state which you
livin bitterly even though you got no cash interest from
this bond will you'd suffer a cash tax hit of
forty percent of thirty six or a bit under fifteen
dollars each year as you went along So that's the
bad news you pay the cash up front The good
news is that when the bond finally came do that
decade later for that grand well you have already paid
the taxes along the way And when taxes are already 00:02:01.504 --> [endTime] paid well we impute you'll be a happier camper
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