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LBO Valuation Using Flows to Equity


Cooper, Ian Anthony; Nyborg, Kjell G (2023). LBO Valuation Using Flows to Equity. Swiss Finance Institute Research Paper 23-74, University of Zurich.

Abstract

The flows to equity method is commonly used in leveraged buyouts and other highly levered transactions. These flows are hybrid flows, mixing expected operating cash flows with promised debt payments under a planned debt schedule. Because of this, it is difficult to accurately estimate the appropriate discount rate, a difficulty that is compounded by the typically changing leverage over time under the planned debt schedule. We show how the flows to equity approach works and discuss its benefits and drawbacks as compared with other, ‘more standard’ methods.

Abstract

The flows to equity method is commonly used in leveraged buyouts and other highly levered transactions. These flows are hybrid flows, mixing expected operating cash flows with promised debt payments under a planned debt schedule. Because of this, it is difficult to accurately estimate the appropriate discount rate, a difficulty that is compounded by the typically changing leverage over time under the planned debt schedule. We show how the flows to equity approach works and discuss its benefits and drawbacks as compared with other, ‘more standard’ methods.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:LBO modelling; Equity free cash flow; Hybrid flows; Discount rate; Leverage
Scope:Discipline-based scholarship (basic research)
Language:English
Date:1 September 2023
Deposited On:19 Sep 2023 14:35
Last Modified:06 Mar 2024 14:40
Series Name:Swiss Finance Institute Research Paper
Number of Pages:11
ISSN:1556-5068
OA Status:Green
Publisher DOI:https://doi.org/10.2139/ssrn.4558785
Other Identification Number:merlin-id:24063
  • Content: Published Version
  • Language: English