Question

QUESTION#1 ate equity firm. You have been tasked with analyzing a leveraged buyout You are an analyst at a private equity firm. You have been ta opportunity of a retail company. Does this look like a good mpany. Does this look like a good investment for the fund? Key Assumptions: The fund expects to hold the company for five years. Comparable 1d the company for five years. Comparable analysis puts the company value at 5* EBITDA. en able to negotiate a Term We have been able to negotiate a Term A loan at 3. A loan at 3.0x LTM EBITDA (5 percent interest rate). We have also been able have also been able to negotiate a high-yield loan for 0.5x LTM EBITDA at a 10 percent interest rate. Assume no transaction fees. Company Assumptions: The company has an LTM EBITDA of $5 million. Management expects the company to grow at 5 percent per year. The company has a $20 million asset that will be evenly depreciated over 20 years. The company's working capital is steadily increasing at $100k per year (resulting in a $100k cash flow decrease). The company will maintain CAPEX spend at $1MM per year and will be depreciated over 20 years. The tax rate is 40 percent.

Answer 1

Income Statement
		1	2	3	4	5
	EBITDA	5,000,000.00	5,250,000.00	5,512,500.00	5,788,125.00	6,077,531.25
Less	Depreciation	150,000.00	200,000.00	250,000.00	300,000.00	400,000.00
	EBIT	4,850,000.00	5,050,000.00	5,262,500.00	5,488,125.00	5,677,531.25
Less	Interest Expense
	Interest on Term Loan	750,000.00	787,500.00	826,875.00	868,218.75	911,629.69
	Interest on high yield Loan	250,000.00	262,500.00	275,625.00	289,406.25	303,876.56
	EBT	3,850,000.00	4,000,000.00	4,160,000.00	4,330,500.00	4,462,025.00
Less	Tax@40%	1,540,000.00	1,600,000.00	1,664,000.00	1,732,200.00	1,784,810.00
	EBT (Tax-affected)	2,310,000.00	2,400,000.00	2,496,000.00	2,598,300.00	2,677,215.00

  

Cumulative Levered Free Cash Flow (FCF)
	EBT (Tax-affected)	2,310,000.00	2,400,000.00	2,496,000.00	2,598,300.00	2,677,215.00
Plus	Depreciation (Non Cash expense)	150,000.00	200,000.00	250,000.00	300,000.00	400,000.00
Less	Capital Expenditure	1,000,000.00	1,000,000.00	1,000,000.00	1,000,000.00	1,000,000.00
Less	Increase in net working capital	100,000.00	100,000.00	100,000.00	100,000.00	100,000.00
	Free Cash Flow	1,360,000.00	1,500,000.00	1,646,000.00	1,798,300.00	1,977,215.00

A steady and predictable cash flow will ensure that LBO target firm will be able to meet its interest payments for the debt it will take on.Steady and Predictable cash flow makes it easier to get a loan since there is less risk that the firm will not be able to meet interest payments