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Congoleum Case

Decent Essays

Question 1: Is Congoleum a good LBO candidate? In other words, does this company have a lot of debt capacity?
To judge if a company is a good LBO candidate the following are very important factors: low levels of debt in the target, stable cash flows, excess cash on-hand, assets that can be used as collateral to raise debt and no major capital requirements to keep the business running on an on-going basis. Congoleum is an ideal LBO candidate because:
1. Low level of debt – estimated long term debt is around 15.6 million
2. High asset base with assets worth 323 million
3. Stable cash flows with estimated total revenues increasing from 559.9 million in 1978 to 937.8 million in 1984 (Note also its strong intellectual property as shown by …show more content…

Question 2: How can you explain the 50% premium paid to the share-holders of Congoleum?
The 50% premium can be explained by the valuation of the firm based purely on its projected future cash flows and assumed growth rate (value = $391.58 million) plus the added value that the ITS can provide (value = $114.2 million) when the leveraged buyout is completed. There are two components to the ITS or income tax shield –
• Firstly the interest expense incurred from taking on

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