LBO Model - Drivers and Returns Attribution Analysis ($ in Millions) Assumptions: EBITDA Purchase Multiple: 12.0 x EBITDA Exit Multiple: 15.0 x Purchase TEV: $ 600 Minimum Cash % EBITDA: 20.0% Debt Used: 5.0 x 250 Equity Contribution: 7.0 x 350 Interest Rate: Tax Rate: 5.0% 25.0% Income Statement: Revenue: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 $ 250 $ 275 $ 297 $ 315 $ 331 $ 347 Growth Rate: 10% 8% 6% 5% 5% EBITDA: Margin: Growth Rate: (-) Depreciation & Amortization: % of Revenue: (-) Interest Expense: Pre-Tax Income: (-) Taxes: Net Income: 50 59 68 77 86 95 20% 22% 23% 25% 26% 28% 18% 16% 13% 11% 11% (28) (27) (25) (23) (21) (10%) (9%) (8%) (7%) (6%) (13) (11) (9) (7) (4) 19 30 43 56 71 (5) (8) (11) (14) (18) $ 14 $ 23 $ 32 $ 42 $ 53 Cash Flow and Debt Repayment: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Net Income: $ 14 $ 23 $ 32 $ 42 $ 53 (+) Depreciation & Amortization: 28 27 25 23 (+/-) Change in Working Capital: (3) (1) 30 % of Change in Revenue: (10%) (5%) 0% 3% 21 1 5% (-) CapEx: (5) (4) (3) (2) (2) % of Change in Revenue: (20%) (18%) (15%) (13%) (10%) (+) Beginning Cash Balance: 12 14 15 (+) Free Cash Flow: 34 44 55 64 73 17 73 (-) Minimum Cash Balance: (12) (14) (15) (17) (19) Cash Flow Available for Debt Repayment: 23 43 53 62 71 Cash Flow Used for Debt Repayment: 23 43 53 62 70 Debt Balance: Cash Balance: Equity Balance: 250 227 185 132 70 12 14 15 17 20 350 364 387 419 461 515 Invested Capital: NOPAT: Return on Invested Capital (ROIC): 600 592 572 551 531 515 24 31 39 47 56 4% 5% 7% 9% 11% Returns Attribution Analysis: Amount: %: EBITDA Growth: $ 545 49% Exit Calculations: Exit Enterprise Value: $ 1,432 Multiple Expansion: 286 26% (-) Debt: Debt Paydown/Cash Generation: 270 25% (+) Cash: 20 Total Return to Equity Investors: $ 1,102 100% Equity Proceeds: $ 1,452 Money-on-Money (MoM) Multiple: Internal Rate of Return (IRR): 4.1 x 33%
LBO Model - Drivers and Returns Attribution Analysis ($ in Millions) Assumptions: EBITDA Purchase Multiple: 12.0 x EBITDA Exit Multiple: 15.0 x Purchase TEV: $ 600 Minimum Cash % EBITDA: 20.0% Debt Used: 5.0 x 250 Equity Contribution: 7.0 x 350 Interest Rate: Tax Rate: 5.0% 25.0% Income Statement: Revenue: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 $ 250 $ 275 $ 297 $ 315 $ 331 $ 347 Growth Rate: 10% 8% 6% 5% 5% EBITDA: Margin: Growth Rate: (-) Depreciation & Amortization: % of Revenue: (-) Interest Expense: Pre-Tax Income: (-) Taxes: Net Income: 50 59 68 77 86 95 20% 22% 23% 25% 26% 28% 18% 16% 13% 11% 11% (28) (27) (25) (23) (21) (10%) (9%) (8%) (7%) (6%) (13) (11) (9) (7) (4) 19 30 43 56 71 (5) (8) (11) (14) (18) $ 14 $ 23 $ 32 $ 42 $ 53 Cash Flow and Debt Repayment: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Net Income: $ 14 $ 23 $ 32 $ 42 $ 53 (+) Depreciation & Amortization: 28 27 25 23 (+/-) Change in Working Capital: (3) (1) 30 % of Change in Revenue: (10%) (5%) 0% 3% 21 1 5% (-) CapEx: (5) (4) (3) (2) (2) % of Change in Revenue: (20%) (18%) (15%) (13%) (10%) (+) Beginning Cash Balance: 12 14 15 (+) Free Cash Flow: 34 44 55 64 73 17 73 (-) Minimum Cash Balance: (12) (14) (15) (17) (19) Cash Flow Available for Debt Repayment: 23 43 53 62 71 Cash Flow Used for Debt Repayment: 23 43 53 62 70 Debt Balance: Cash Balance: Equity Balance: 250 227 185 132 70 12 14 15 17 20 350 364 387 419 461 515 Invested Capital: NOPAT: Return on Invested Capital (ROIC): 600 592 572 551 531 515 24 31 39 47 56 4% 5% 7% 9% 11% Returns Attribution Analysis: Amount: %: EBITDA Growth: $ 545 49% Exit Calculations: Exit Enterprise Value: $ 1,432 Multiple Expansion: 286 26% (-) Debt: Debt Paydown/Cash Generation: 270 25% (+) Cash: 20 Total Return to Equity Investors: $ 1,102 100% Equity Proceeds: $ 1,452 Money-on-Money (MoM) Multiple: Internal Rate of Return (IRR): 4.1 x 33%
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
Section: Chapter Questions
Problem 1PS
Related questions
Question
Consider the simple LBO model shown below for the cash-free, debt-free leveraged buyout
of a restaurant business that is shifting to a franchise-based model to improve its margins
and reduce its capital intensity:
The private equity firm reviewing this deal believes that it can achieve this 30%+
because of the company’s strong EBITDA and FCF growth and the fact that the
triples, even as the revenue and EBITDA growth rates slow down by the end.
Also, it argues that since 49% of the returns come from EBITDA Growth, with only 26% from
Multiple Expansion, the assumptions are not overly aggressive. What is the biggest
POTENTIAL PROBLEM with these arguments?
a. The assumptions driving the EBITDA and FCF growth are very aggressive, as most
companies do not increase their margins by nearly 50% over 5 years.
b. Multiple Expansion should never contribute to the returns because it’s too
speculative; this model should assume an Exit Multiple equal to the Purchase
Multiple instead.
c. Even with a significantly higher ROIC, the higher Exit Multiple is not justified because
both Revenue Growth and EBITDA Growth decline by Year 5.
d. It’s unrealistic for the company to cut its CapEx by more than 50% and turn its
Change in Working Capital into a source of funds as the company’s EBITDA nearly
doubles.
Transcribed Image Text:LBO Model - Drivers and Returns Attribution Analysis
($ in Millions)
Assumptions:
EBITDA Purchase Multiple:
12.0 x
EBITDA Exit Multiple:
15.0 x
Purchase TEV:
$
600
Minimum Cash % EBITDA:
20.0%
Debt Used:
5.0 x
250
Equity Contribution:
7.0 x
350
Interest Rate:
Tax Rate:
5.0%
25.0%
Income Statement:
Revenue:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
$
250
$
275
$
297
$
315
$
331
$
347
Growth Rate:
10%
8%
6%
5%
5%
EBITDA:
Margin:
Growth Rate:
(-) Depreciation & Amortization:
% of Revenue:
(-) Interest Expense:
Pre-Tax Income:
(-) Taxes:
Net Income:
50
59
68
77
86
95
20%
22%
23%
25%
26%
28%
18%
16%
13%
11%
11%
(28)
(27)
(25)
(23)
(21)
(10%)
(9%)
(8%)
(7%)
(6%)
(13)
(11)
(9)
(7)
(4)
19
30
43
56
71
(5)
(8)
(11)
(14)
(18)
$
14 $
23 $
32 $
42 $
53
Transcribed Image Text:Cash Flow and Debt Repayment:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Net Income:
$
14 $
23 $
32 $
42 $
53
(+) Depreciation & Amortization:
28
27
25
23
(+/-) Change in Working Capital:
(3)
(1)
30
% of Change in Revenue:
(10%)
(5%)
0%
3%
21
1
5%
(-) CapEx:
(5)
(4)
(3)
(2)
(2)
% of Change in Revenue:
(20%)
(18%)
(15%)
(13%)
(10%)
(+) Beginning Cash Balance:
12
14
15
(+) Free Cash Flow:
34
44
55
64
73
17
73
(-) Minimum Cash Balance:
(12)
(14)
(15)
(17)
(19)
Cash Flow Available for Debt Repayment:
23
43
53
62
71
Cash Flow Used for Debt Repayment:
23
43
53
62
70
Debt Balance:
Cash Balance:
Equity Balance:
250
227
185
132
70
12
14
15
17
20
350
364
387
419
461
515
Invested Capital:
NOPAT:
Return on Invested Capital (ROIC):
600
592
572
551
531
515
24
31
39
47
56
4%
5%
7%
9%
11%
Returns Attribution Analysis:
Amount:
%:
EBITDA Growth:
$
545
49%
Exit Calculations:
Exit Enterprise Value: $ 1,432
Multiple Expansion:
286
26%
(-) Debt:
Debt Paydown/Cash Generation:
270
25%
(+) Cash:
20
Total Return to Equity Investors: $ 1,102
100%
Equity Proceeds:
$ 1,452
Money-on-Money (MoM) Multiple:
Internal Rate of Return (IRR):
4.1 x
33%
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