Credit Analysis for a Leveraged Buyout

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The management of Wyatt Corporation is frustrated because its parent company, SRW Corpora- tion, repeatedly rejects Wyatt’s capital spending requests. These refusals led Wyatt’s management to conclude its operations play a limited role in the parent’s long-range plans. Acting on this assumption, Wyatt’s management approaches a merchant banking firm about the possibility of a leveraged buyout of itself. In their proposal, Wyatt management stresses the stable, predictable cash flows from Wyatt’s operations as more than adequate to service the debt required to finance the proposed leveraged buyout. As a partner in the merchant banking firm, you investigate the feasibility of their proposal. You receive the following balance sheet and supplementary information for Wyatt Corporation. The management of Wyatt further discloses that, following their proposed purchase, they intend to acquire machinery costing $325,000 in each of the next three years to overcome the previous low level of capital expenditures while a subsidiary of SRW Corporation. Management argues these expenditures are needed for competitive reasons.


a. Using information in the balance sheet and the supplementary disclosures, prepare a statement of cash flows (indirect method) for the year ended December 31, Year 10.

b. Using the statement of cash flows from a and assuming that debt service is $300,000 per year after the leveraged buyout, evaluate the feasibility of management’s proposal.

Supplementary Information:

1. Dividends declared and paid in Year 10 were $74,000.

2. Depreciation expense for Year 10 was $246,000.

3. Machinery originally costing $61,000 was sold for $34,000 in Year 10.


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