A finished FIN-660 Topic 1 leveraged recapitalization assessment example, adding leases and an after-tax pension deficit to debt, finding the firm above its peers and declining a 400 million recap. Searches like "fin 660 topic 1 assignment example", "fin660 topic 1 sample" and "fin-660 topic 1 example" land here.
What a finished FIN-660 Topic 1 leveraged recapitalization assessment looks like
Illustrative figures in millions carry the finished assessment. Reported net debt of 900 against EBITDA of 500 gives the 1.8 times the activist quotes; peers report about 2.6, so the activist sees 0.8 turns, or 400, of unused capacity. The assessment then adds what the reported ratio leaves out. Lease liabilities of 450 join debt, and EBITDA is restated before the 60 of annual lease cost, giving 560. An unfunded pension obligation of 160, or 120 after tax at 25 percent, is added as well. Adjusted debt of 1,470 over 560 gives about 2.6 times, above the peers' 2.5 on the same basis. After the proposed recap the adjusted figure would reach about 3.3. The assessment recommends a 150 buyback funded from two years of free cash flow instead.
How a FIN-660 Topic 1 example is structured
The assessment answers the activist in the activist's own terms first and then changes the terms. Its opening restates the proposal: borrow 400, repurchase shares, and move reported leverage to the peer median. A theory section grants what the trade-off view predicts for a firm with stable cash flow and taxable income, and notes John Graham's evidence that many firms appear to use less debt than tax benefits alone would justify. The adjustment section walks the balance sheet line by line, adding leases and the after-tax pension deficit and restating EBITDA so numerator and denominator match. A peer table repeats the adjustment for five comparable firms, since comparing adjusted figures with reported ones would be meaningless. The recap is tested on adjusted leverage and on coverage. The recommendation defends a smaller buyback funded from cash flow against the full recap and says which future result would change its answer.
The activist's arithmetic, restated fairly
Peers at about 2.6 times reported EBITDA against the firm's 1.8 imply 0.8 turns of room, which on 500 of EBITDA is the 400 proposed.
Leases added to both sides
Lease liabilities of 450 enter debt and 60 of lease cost comes back into EBITDA, so the ratio compares obligations and earnings measured the same way.
A pension deficit counted after tax
The 160 shortfall is a claim on future cash ahead of any shareholder, and at a 25 percent rate it adds 120 to adjusted debt.
Spare capacity that disappears on adjustment
Adjusted leverage of about 2.6 times sits above the peers' adjusted 2.5, and the full recap would carry it to roughly 3.3.
A smaller buyback defended against the recap
Returning 150 from two years of free cash flow gives holders cash without borrowing, and the assessment names the adjusted leverage that would justify doing more.
Where marks go in FIN-660 Topic 1
Answers that argue with the activist on the reported ratio draw the largest deduction, because that ratio leaves out 570 of obligations and the topic asks for capital structure on the balance sheet as it actually stands. Adding lease liabilities to debt while EBITDA stays net of lease cost mismatches the ratio and overstates leverage. Papers that compare the firm's adjusted figure with peers' reported ones set two different measures side by side. Treating a pension deficit as an accounting footnote misses a claim the firm must fund whatever it does with its shares. Citing trade-off theory as the answer, detached from what this firm owes, recommends a number rather than analyzing one. A rejection of the recap with no alternative offered leaves the board defending inaction against a holder who has proposed something.
Get a FIN-660 Topic 1 example written to your instructions
Send the FIN-660 Topic 1 instructions and the rubric in your classroom, with the firm's statements your section assigns. We write a custom example to them, with the proposal restated, leases and pension obligations adjusted on both sides of the ratio, peers restated on the same basis and a defended alternative to the recap, in 24 to 48 hours. The first one is free.
FIN-660 Topic 1 questions, answered
Why add leases to debt?
Because a long lease commits the firm to fixed payments much as a loan does, and a firm that leases its warehouses carries obligations a firm that borrowed to buy them would show as debt. Adjusting both firms the same way makes them comparable. The adjustment must run through EBITDA as well, adding back the lease cost, or the ratio compares an enlarged debt figure with earnings already reduced by the same payments.
Why count the pension deficit after tax?
Because contributions that close the deficit are generally deductible, so each dollar paid costs the firm less than a dollar after tax. The case's convention applies its 25 percent rate, turning a 160 shortfall into 120 of debt-like obligation. Some analysts add the full pre-tax amount instead; the assessment names its convention and shows that either choice leaves the firm above its peers measured the same way.
Could the assessment answer a real activist?
No. The distributor, its leases, the pension figures and the peer ratios are invented to make the gap between reported and adjusted leverage plain. A real response to an activist depends on audited statements, actual lease and pension disclosures, rating agency methods and advice from the board's bankers and counsel. The assessment demonstrates FIN-660 capital structure reasoning, and nothing in it is investment advice.