KKR is debating on whether or not it should take part in a acquisition of CVS Health. The entry multiple is 7x2021 EBITDA. CVS Health holds 4m In cash and cash equivalents and currently has $15m in long term debt.Financing fees for the transaction will be 5% of Enterprise Value. KKR will take out 3.5x EBITDA in seniornotes and 2x EBITDA in one term loan. KKR requires a minimum cash balance of 3% of LTM revenue andcurrently holds 4m in cash. KKR's total revenue is 10m, its 2021 EBITDA was 7m and its existing cash is .5m.How much equity should KKR purchase to fund this transaction? Assume KKR will refinance CVS's debt.

Equity, in the context of corporate finance and investments, refers to ownership or ownership interest in a company. It represents the residual interest in the assets of a company after deducting its liabilities. In other words, equity represents the value that belongs to the owners or shareholders of a company.Equity can take various forms, including common stock, preferred stock, or other ownership instruments. When you purchase equity in a company, you essentially acquire a stake in the ownership of that company. This ownership stake entitles you to a portion of the company's profits (in the form of dividends, in the case of common or preferred stock) and the right to vote on certain corporate matters, depending on the type of equity you hold.Equity is different from debt in that debt represents money borrowed by the company that must be repaid with interest, while equity represents an ownership interest with a claim on the company's assets and earnings. Equity investors bear the risks and rewards associated with the company's performance and value.In the context of your previous question about KKR purchasing equity to fund the acquisition of CVS Health, that mean that KKR would acquire ownership interests or shares in CVS Health as part of the acquisition financing. This ownership stake would give KKR a say in the management and operations of CVS Health and potentially entitle them to a share of its future profits.To determine how much equity KKR should purchase to fund the acquisition of CVS Health, we'll need to calculate the Enterprise Value (EV) of CVS Health, consider the financing fees, and account for KKR's cash requirements and financing plan.Calculate the Enterprise Value (EV) of CVS Health:Consider CVS Health's cash and debt:Cash and cash equivalents: $4 millionLong-term debt: -$15 million (Note that this is a liability, so it's subtracted)Calculate the Net Enterprise Value (NEV) of CVS Health:Calculate the financing fees:Financing fees as a percentage of Enterprise Value is 5%Calculate the total amount KKR needs to finance the acquisition:Determine KKR's financing plan:KKR will take out 3.5x EBITDA in senior notes.KKR will take out 2x EBITDA in one term loan.KKR's EBITDA = $7 millionAccount for KKR's minimum cash balance requirement:KKR requires a minimum cash balance of 3% of LTM (Last Twelve Months) revenue.KKR's total revenue is $10 million.Determine how much equity KKR should purchase:KKR should purchase approximately $1.15 million in equity to fund the acquisition of CVS Health while considering the financing plan, financing fees, and minimum cash balance requirement.The value of equity KKR should purchase is $1.15 million.

Answered: How much equity should KKR purchase to…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

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