of stock outstanding, and no debt. ClydeCo pays federal income tax of $510,000 ($1.5 million multiplied by 34 percent), resulting in net after-tax income of $990,000 ($1.5 million lees
$510,000). Earnings per share are $10 ($990,000 divided by 99,000 shares). The stock sells on the market at about $80 per share (or 8 times earnings).
DonnorCo tenders for and acquires all of the outstanding ClydeCo stock for $120 cash per share, 50 percent more than the market price, for a total price of $11.88 million. DonnorCo puts up $880,000 of its own funds and raises the remaining $11 million by issuing balloon notes paying 12 percent interest only for 10 years, to be assumed by ClydeCo. The annual net operating income of ClydeCo after the buyout is unchanged, except for debt service and taxes.
Complete the following chart showing the distribution of ownership of ClydeCo's operating
income before and after the leveraged buyout, using a 34 percent corporate tax rate:
ClydeCo's original shareholders $ 990,000 -0-
Bondholders -0- $
DonnorCo -0- $
Corporate income taxes $ 510,000 $
Total operating income $1,500,000 $1,500,000
Who has bene?ted from this transaction: the public sector or the private sector?