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| Proteus Co, a large listed company, has a number of subsidiaries in different industries but its main line of business is developing surveillance systems and intruder alarms. It has decided to sell a number of companies that it considers are peripheral to its core activities. One of these subsidiary companies is Tyche Co, a company involved in managing the congestion monitoring and charging systems that have been developed by Proteus Co. Tyche Co is a profitable business and it is anticipated that its revenues and costs will continue to increase at their current rate of 8% per year for the foreseeable future. Tyche Co’s managers and some employees want to buy the company through a leveraged management buy-out. An independent assessment estimates Tyche Co’s market value at $81 million if Proteus Co agrees to cancel its current loan to Tyche Co. The managers and employees involved in the buy out will invest $12 million for 75% of the equity in the company, with another $4 million coming from a venture capitalist for the remaining 25% equity. Palaemon Bank has agreed to lend the balance of the required funds in the form of a 9% loan. The interest is payable at the end of the year, on the loan amount outstanding at the start of each year. A covenant on the loan states that the following debt-equity ratios should not be exceeded at the end of each year for the next five years:  Shown below is an extract of the latest annual income statement for Tyche Co:  As part of the management buy-out agreement, it is expected that Proteus Co will provide management services costing $12 million for the first year of the management buy-out, increasing by 8% per year thereafter. The current tax rate is 25% on profits and it is expected that 25% of the after-tax profits will be payable as dividends every year. The remaining profits will be allocated to reserves. It is expected that Tyche Co will repay $3 million of the outstanding loan at the end of each of the next five years from the cash flows generated from its business activity.Required: (a) Briefly discuss the possible benefits to Proteus Co of disposing Tyche Co through a management buy-out. |