Question
Suppose Blackstone arranges for $1 billion of strip financing to be used in a leveraged buyout. The strip financing is composed of three items: a
Suppose Blackstone arranges for $1 billion of strip financing to be used in a leveraged buyout. The strip financing is composed of three items: a $400 million bank loan, $500 million of bonds, and $100 million of common shares. The $500 million bonds are subsidized in that they only pay a 4% coupon even though the going market rate on such bonds is 9%. The bank loan is not subsidized. The LBO firm will pay the interest (i.e. coupon) plus an additional $20 million of principle each year on the subsidized bonds for the next 4 years. It is anticipated that in the fifth year the firm will go public again and repay the outstanding principle and interest on these bonds. The expected payments are given below.
Year 0 1 2 3 4 5
Interest payment - 20 19.2 18.4 17.6 16.8
Additional payment - 20 20 20 20 420
Principle due 500 480 460 440 420 0
What is the PV of the bond component of the strip to the firm (in millions)? [i.e. how much is added to equity value because of the subsidy?]
Group of answer choices
60
70
80
90
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