Capital Structure Analysis

Leverage is an important factor when considering restructurings. Leverage can be increased to defend against takeovers, pay out special dividends, repurchase shares, or optimize capital structures. During a divestiture transaction, leverage of the parent company and the intended divestiture target needs to be considered.

Each industry and sector will have specific leverage ratios that are acceptable. When analyzing a restructuring transaction, it is important to obtain comparable ratios within the industry since capital requirements, growth opportunities and cash flow trends vary.

With the industry context, one now has a framework to determine the impact of the proposed restructuring. In divestitures, the capital structures of the parent and the divested company must be analyzed to make sure that the capital structure of the divested business is appropriate for its place in the business cycle.