Base Multiplier Approach & Flow Of Funds Approach

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Base Multiplier Approach and the Flow of Funds Approach

Base Multiplier Approach and the Flow of Funds Approach

Base Multiplier

“A method of corporate takeover or merger popularized in the 1980s in which the controlling interest in a company's corporate stock was purchased using a substantial fraction of borrowed funds. These takeovers were, as the financial-types say, heavily multiplied. The person or company doing the "borrowing" used very little of their own money and borrowed the rest, often by issuing extremely risky, but high interest, "junk" funds. These funds were high-risk, and thus paid a high interest rate, because little or nothing backed them up”.

A clear example of a financial merger, Flow of Funds are practically synonymous with LBOs

A typical LBO is financed at least 90% with debt

The firm's assets are used to secure the borrowing

The lender's take a portion of the firm's equity

To be a viable candidate for a LBO, a firm should have:

A good position in its industry with a solid record of profitability

Low level of debt, but high level of assets to use as collateral

Stable and predictable cash flows that are adequate for meeting debt obligations and working capital needs

Flow of Funds

Flow of Fund is “A fund that involves greater than usual risk as an investment and pays a relatively high rate of interest, typically issued by a company lacking an established earnings history or having a questionable credit history. Flow of Funds became a common means for raising business capital in the 1980s, when they were used to help finance the purchase of companies.

When a corporation or municipality has a loan of money from an investor, it gives the investor a fund. The fund is like promissory note as it affirms that the amount will be paid back and when it will be paid back, and what interest will be paid on loan money. Funds appear in two grades. Firstly Investment grade funds, Those that Standard & Poor's and Moody's rate as carrying no more than medium risk and at least medium quality. Secondly Flow of Funds: Those with high risk and below medium quality, and those in default. Saving and invest money is an excellent proposal, however, some investments are better than others. This is predominantly factual when money is gathered to pay for various expenses. That's because these are considered as justifiable objective that not only helps individuals but also reinforces the nation's financial system. Accordingly, the government provides explicit tax compensation for some funds to promote amongst people to save for the set goals. Fund is issued with the ratings, which are status specified to funds based on the recognition of the government, metropolis, or company issuing them. The ratings are allocated by autonomous rating agencies [this is done in the United States by the largest companies called Standard & Poors and Moody's Investors Services] and they commonly run from grades ratings AAA to D. Funds with ratings from AAA to BBB are ...
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