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LBO Valuation Using Flows-to-Equity


Cooper, Ian A; Nyborg, Kjell G (2023). LBO Valuation Using Flows-to-Equity. In: Cumming, Douglas; Hammer, Benjamin. The Palgrave Encyclopedia of Private Equity. Cham: Palgrave Macmillan, 153.

Abstract

The flows-to-equity method is commonly used in leveraged buyouts and other highly leveraged 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 leveraged 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:Book Section, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Discount rate, Equity free cash flows, Hybrid flows, LBO modeling, Leverage
Scope:Discipline-based scholarship (basic research)
Language:English
Date:11 October 2023
Deposited On:22 Nov 2023 11:23
Last Modified:10 Apr 2024 11:07
Publisher:Palgrave Macmillan
ISBN:9783030387389
OA Status:Closed
Free access at:Official URL. An embargo period may apply.
Publisher DOI:https://doi.org/10.1007/978-3-030-38738-9_153-1
Other Identification Number:merlin-id:24170