5.5 Assignment: Mini Case Study Getting Started A "leveraged buyout" is when a company’s own assets are used as collateral to support a loan that is then used to purchase that same company. It has been described as the company buying itself. In the 1980s, leveraged buyouts became popular as a way to extract more value for shareholders. The approach was highly successful, with several billionaires created in the process. However, this high-risk approach also has serious ethical and financial consequences. It leaves a company saddled with an enormous pile of debt. Frequently the company is stripped of its brands or dismantled to repay the debt. While shareholders and executives may benefit, creditors, suppliers, or employees are often harmed. With this assignment, you will have the opportunity to evaluate a real-life leveraged buyout of your choice, and to carefully consider the ethical and financial implications of the decisions made by executives and their advisors. Upon successful completion of this assignment, you will be able to: Understand innovative approaches to the use of debt in business. Evaluate the implications and appropriateness of the aggressive use of debt. Resources Video: Basic Leveraged Buyout (LBO) Video: KKR Henry Kravis Background Information The leveraged buyout (LBO) has become a famous, perhaps infamous, approach to corporate finance. Whenever people talk about corporate raiders, they are probably referring to leveraged buyouts. The method has been featured in several movies, including Wall Street and The Boiler Room . The record-breaking 1989 acquisition of RJR Nabisco by famed private-equity firm KKR was even featured in a TV movie Barbarians at the Gate . While it is easy to disparage such an aggressive and risky maneuver, there are many examples of where a leveraged buyout has resulted in not only great profits but also greatly improved businesses. When a company is purchased through an LBO, it is taken private, meaning its shares are no longer publicly traded. This frequently gives the company the space and discretion it needs to restructure itself.  For example, in 1986 supermarket chain Safeway was purchased by KKR, using only $129 million in cash but over $5 billion in debt. Safeway divested some of its assets and closed many of its unprofitable stores. However, by 1990 the company had greatly improved its profitability and revenue. The company went public again, resulting in $7.2 billion in profits for KKR. Safeway continues to operate successfully to this day, employing some 140,000 people. In 2015, the company was purchased by Albertson’s for $9.4 billion. In this assignment, you will investigate an example of a real-life leveraged buyout that is of interest to you. You will then have the opportunity to analyze whether the decision to take the company private through an LBO was appropriate, not only in terms of its financial results for the company’s owners but also in consideration.

1. 5.5 Assignment: Mini Case Study
Getting Started
A "leveraged buyout" is when a company’s own assets are used
as collateral to support a loan that is then used to purchase that
same company. It has been described as the company buying
itself. In the 1980s, leveraged buyouts became popular as a way
to extract more value for shareholders. The approach was highly
successful, with several billionaires created in the process.
However, this high-risk approach also has serious ethical and
financial consequences. It leaves a company saddled with an
enormous pile of debt. Frequently the company is stripped of its
brands or dismantled to repay the debt. While shareholders and
executives may benefit, creditors, suppliers, or employees are
often harmed. With this assignment, you will have the
opportunity to evaluate a real-life leveraged buyout of your
choice, and to carefully consider the ethical and financial
implications of the decisions made by executives and their
advisors.
Upon successful completion of this assignment, you will be able
to:
Understand innovative approaches to the use of debt in
business.
Evaluate the implications and appropriateness of the aggressive
use of debt.

2. Resources
Video: Basic Leveraged Buyout (LBO)
Video: KKR Henry Kravis
Background Information
The leveraged buyout (LBO) has become a famous, perhaps
infamous, approach to corporate finance. Whenever people talk
about corporate raiders, they are probably referring to leveraged
buyouts. The method has been featured in several movies,
including
Wall Street
and
The Boiler Room
. The record-breaking 1989 acquisition of RJR Nabisco by
famed private-equity firm KKR was even featured in a TV
movie
Barbarians at the Gate
.
While it is easy to disparage such an aggressive and risky
maneuver, there are many examples of where a leveraged
buyout has resulted in not only great profits but also greatly
improved businesses. When a company is purchased through an
LBO, it is taken private, meaning its shares are no longer
publicly traded. This frequently gives the company the space
and discretion it needs to restructure itself.

3. For example, in 1986 supermarket chain Safeway was purchased
by KKR, using only $129 million in cash but over $5 billion in
debt. Safeway divested some of its assets and closed many of its
unprofitable stores. However, by 1990 the company had greatly
improved its profitability and revenue. The company went
public again, resulting in $7.2 billion in profits for KKR.
Safeway continues to operate successfully to this day,
employing some 140,000 people. In 2015, the company was
purchased by Albertson’s for $9.4 billion.
In this assignment, you will investigate an example of a real-
life leveraged buyout that is of interest to you. You will then
have the opportunity to analyze whether the decision to take the
company private through an LBO was appropriate, not only in
terms of its financial results for the company’s owners but also
in consideration of the impact to the firm’s other stakeholders.
Instructions
Review the rubric to make sure you understand the criteria for
earning your grade.
View the video
Basic Leveraged Buyout
. https://www.khanacademy.org/economics-finance-
domain/core-finance/stock-and-bonds/leveraged-buy-
outs/v/basic-leveraged-buyout-lbo
View the video
KKR Henry Kravis
. Carefully consider the financial and ethical implications of the
company’s approach to financing. https://fod-infobase-
com.eu1.proxy.openathens.net/p_ViewVideo.aspx?xtid=145045

4. Study this workshop’s devotional about the implications of
debt.
Research and identify an example of a recent leveraged buyout
that interests you. You may choose any company you like, as
long as it involves an LBO transaction and you can find enough
information to shed light on the deal. Use OCLS and the
internet to conduct research on the reasons for the transaction
and the outcome.
Prepare a paper analyzing the ethical and financial implications
of the selected company’s LBO transaction:
Provide a brief summary of the company and its LBO
transaction.
Explain the justifications given for the company’s decision to
execute an LBO.
Evaluate the impact of the LBO on the company’s stakeholders,
including its shareholders and employees.
Assess whether the LBO was considered successful and explain
why.
Explain, based on your informed opinion and research, whether
executing the LBO was a good decision.
Review the 5.1 Exercise regarding the biblical perspective on
debt. Evaluate the LBO strategy based on biblical principles and
cite a Bible verse that supports your position.
Be sure to provide a detailed analysis and assessment that

5. demonstrates your critical thinking and understanding of
financial analysis. Your finished paper should be 500–600
words in length and include at least three sources in addition to
your biblical reference.
Prepare your paper in Microsoft Word in a professional manner,
using proper spelling, grammar, and APA style. Include a
references list. Be sure to appropriately cite your sources for
any commentary or analysis you rely upon.
For questions on APA style, go to
OCLS APA Writing Styles Guides
.
When you have completed your assignment, save a copy for
yourself and submit a copy to your instructor by the end of the
workshop.
===============================================
=============================
5.4 Assignment: Spreadsheet Exercises
Getting Started
In the last workshop, we delved into financial planning, laying

6. the groundwork for bringing a company’s great product and
project ideas into being. In this workshop, we are examining a
key decision faced by top executives: the manner in which these
ideas should be funded. Just like there are many ways to run a
business's operations, there are many alternatives to providing
the financing a company needs. The organization’s leaders
should understand the implications of these options before
making a decision. The company’s approach to financing can
have a dramatic effect on its future. With this exercise, you will
have an opportunity to explore the features and effects of
financing decisions.
Upon successful completion of this assignment, you will be able
to:
Analyze rates of return and components of return.
Evaluate the impact of exchange rates on returns.
Evaluate the financial costs of raising funding for a business.
Evaluate the impact of financial leverage on a company’s
earnings and stability.
Resources
Textbook:
Analysis for Financial Management
Website:
Connect

7. File: Higgins Chapter 5 Slides
File: Higgins Chapter 6 Slides
File: Assignment 5.4 Workbook
File: Workshop Five Practice Problems Workbook
Background Information
Every day, businesses fail not because they don’t have great
products or because they don’t operate effectively but because
they make poor financing decisions. The methods of funding
chosen by businesses are part of their infrastructure and can be
every bit as important as the design of their products or the
quality of their services. Sadly, many top executives are poorly
equipped to handle financing decisions. They don’t understand
how the company’s financial structure could affect its stability,
flexibility, or viability. They fail to see how funding decisions
could either create a competitive advantage or serious obstacles
that interfere with their ability to serve customers and satisfy
shareholders.
With this assignment, you will complete a series of short
exercises designed to help you explore the implications of
various financing decisions. Hopefully this will leave you better
equipped to face such decisions with wisdom and skill.
Instructions
Review the rubric to make sure you understand the criteria for
earning your grade.

8. In your textbook,
Analysis for Financial Management
, read Chapter 5, “Financial Instruments and Markets,” and
Chapter 6, “The Financing Decision.”
Download and review
Higgins Chapter 5 Slides
and
Higgins Chapter 6 Slides
to help you further understand the chapter concepts.
Study the provided practice problems and solutions in the
Workshop Five Practice Problems Workbook
to help you better understand the processes used to analyze
financial statements.
Using the
Assignment 5.4 Workbook
(course exclusive), complete all eight of the following
problems:
Calculating Returns: Problems 1 through 4
Determining Issue Costs: Problems 5 and 6
Evaluating the Impact of Financial Leverage: Problems 7 and 8
Be sure your Excel spreadsheet is prepared in a professional
manner, with answers clearly indicated and all your calculations

9. shown. Full credit will not be given if your process for arriving
at the answer is not fully displayed, including any intermediate
steps.
When you have completed your assignment, save a copy for
yourself and submit a copy to your instructor by the end of the
workshop
===============================================
=======
5.3 Discussion: The Goal Debate (Initial Post)
Getting Started
"Governance" could be defined simply as the mechanisms used
to control a corporation and thereby ensure it seeks to maximize
the best interests of its stockholders. Stockholders are the
ultimate owners of a corporation. They elect representatives,
who sit on a Board of Directors, to oversee the company and to
hire its top executives. These managers are acting as agents of
the stockholders and are legally obligated (they have a fiduciary
duty) to pursue the goals set out for them by the Board.
Nevertheless, despite even the best governance processes, there
is always a temptation for managers to pursue their own self-
interests instead of the interests of their stockholders. This is
known as an "agency problem." Furthermore, it is not always

10. clear what goals managers should pursue. The primary goals of
corporations have been a subject of intense debate for nearly
100 years.
Upon successful completion of this discussion, you will be able
to:
Evaluate the ethical and financial implications of governance
and agency problems.
Analyze the appropriateness of various alternative primary
goals for public corporations.
Resources
Textbook:
Analysis for Financial Management
Website:
Connect
File: Higgins Chapter 5 Slides
File: Higgins Chapter 6 Slides
Article:
The Social Responsibility of Business is to Increase its Profits
Background Information

11. Agency problems have been an issue with large organizations
throughout recorded history. It has been said when God hired
Adam and Eve to oversee His creation, it created an agency
problem. Today, governance procedures should help align a
company’s behavior with the priorities of its owners. However,
a single company may have thousands of stockholders. These
stockholders generally don’t have the time or inclination to get
personally involved in the day-to-day operations of the
companies they have invested in. They have little choice but to
trust the agents they have hired will act in their best interests.
Additionally, there are often disagreements about what a
corporation’s priorities should be.
In 1951, a stockholder sued manufacturing company A.P. Smith
over alleged misuse of his funds. In an apparent failure of their
governance systems, the company’s executives had decided to
make a large donation to the engineering school at Princeton
University. The stockholder argued if he had desired to make a
charitable gift, he would have done so on his own. He did not
appreciate the company diverting money he had intended to
fund their operations and instead using it for a cause that had no
economic benefit (Pierce, 2015).
Despite this stockholder’s protestations, an appellate court
ultimately ruled philanthropy was an acceptable use of funds,
presuming such a gift might engender goodwill towards the
corporation (Pierce, 2015). This ruling encouraged more
companies to follow suit. By the 1960s, several “5 percent
clubs” (Vogel, p. 20) had emerged in the United States. These
groups were made up of companies who had committed to give
at least 5% of their pretax earnings to charity.
In 1970, famed economist and Nobel Prize winner Milton
Friedman responded to this movement. In an article for
New York Times Magazine
, he boldly proclaimed, "there is one and only one social

12. responsibility of business—to use its resources and engage in
activities designed to increase its profits" (p. 126). He went on
to say anything else was "collectivist doctrine…and
fundamentally subversive" (p. 126). This article became the
focus of four decades of scholarly debate.
References
Friedman, M. (1970, September 13). The social responsibility
of business is to increase its profits.
The New York Times Magazine
, 32–33, 122, 124, 126.
http://umich.edu/~thecore/doc/Friedman.pdf
Pierce, J. (2015). The rights of shareholders in authorizing
corporate philanthropy.
Villanova Law Review
,
60
(2), 1–32.
https://digitalcommons.law.villanova.edu/cgi/viewcontent.cgi?a
rticle=3271&context=vlr
Vogel, D. J. (2005). Is there a market for virtue? The business
case for corporate social responsibility.
California Management Review
,
47
, 19–45.
Instructions
Review the rubric to make sure you understand the criteria for
earning your grade.

13. In your textbook,
Analysis for Financial Management
, read Chapter 5, “Financial Instruments and Markets,” and
Chapter 6, “The Financing Decision.”
Download and review
Higgins Chapter 5 Slides
and
Higgins Chapter 6 Slides
to help you further understand the chapter concepts.
Study Milton Friedman’s (1970) article,
The Social Responsibility of Business is to Increase its Profits
, on the primary goals of a corporation.
http://umich.edu/~thecore/doc/Friedman.pdf
Navigate to the threaded discussion and respond to the
following prompts:
What is the primary goal a publicly traded corporation should
pursue and why?
Support your position with at least one biblical principle with a
specific Bible verse that you feel is relevant to the situation.
Explain how and why it applies.
Your post should be based on the chapters, as well as other
resources that can contribute to the discussion. Use OCLS to
search for relevant scholarly sources you can use to support
your position.
This initial post should be 200–400 words in length and include

14. at least one academic source that is properly cited. Your post is
due by the end of the workshop.
For questions on APA style, go to
OCLS Writing Styles Guides
.
A single post asserting your position is all that is required for
this assignment. However, be prepared to defend your position
in the following workshop.