PE fund Red Llama buys a company (with no existing debt or cash) for $500 million, at a purchase EBITDA multiple of 10.0x. Considering the financing, they figure they need to keep an interest coverage ratio of 1.8 post buyout. At that level the cost of debt is 7.4%. They borrow up to their debt capacity. At the end of the 3-year period, they sell the company at an exit EBITDA multiple of 12.0x. However, EBITDA has not changed at all. Capital expenditure and working capital investment are minimal and there is no dividend payment. All free cash flows are used to pay down debt. As a result, PE fund has paid off $60 million worth of debt during the 3-year period. What’s the EBITDA of Red Llama?
PE fund Red Llama buys a company (with no existing debt or cash) for $500 million, at a purchase EBITDA multiple of 10.0x. Considering the financing, they figure they need to keep an interest coverage ratio of 1.8 post buyout. At that level the cost of debt is 7.4%. They borrow up to their debt capacity. At the end of the 3-year period, they sell the company at an exit EBITDA multiple of 12.0x. However, EBITDA has not changed at all. Capital expenditure and working capital investment are minimal and there is no dividend payment. All free cash flows are used to pay down debt. As a result, PE fund has paid off $60 million worth of debt during the 3-year period. What’s the EBITDA of Red Llama?
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
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PE fund Red Llama buys a company (with no existing debt or cash) for $500 million, at a purchase EBITDA multiple of 10.0x. Considering the financing, they figure they need to keep an interest coverage ratio of 1.8 post buyout. At that level the cost of debt is 7.4%. They borrow up to their debt capacity. At the end of the 3-year period, they sell the company at an exit EBITDA multiple of 12.0x. However, EBITDA has not changed at all. Capital expenditure and working capital investment are minimal and there is no dividend payment. All free cash flows are used to pay down debt. As a result, PE fund has paid off $60 million worth of debt during the 3-year period.
What’s the EBITDA of Red Llama?
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