Q3. If EBIT in Year 1 is 6.5M (instead of 11.5M, in the attached screenshot), but all other assumptions are the same, what is the internal rate of return to: (i) Senior Debt Investors; (ii) Mezzanine Debt Investors; (iii) Equity Investors?
Q3. If EBIT in Year 1 is 6.5M (instead of 11.5M, in the attached screenshot), but all other assumptions are the same, what is the internal rate of return to: (i) Senior Debt Investors; (ii) Mezzanine Debt Investors; (iii) Equity Investors?
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
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Q3. If EBIT in Year 1 is 6.5M (instead of 11.5M, in the attached screenshot), but all other assumptions are the same, what is the
(i) Senior Debt Investors;
(ii) Mezzanine Debt Investors;
(iii) Equity Investors?
Transcribed Image Text:Leveraged buyout example
Assume the following: (All cashflows in $M occur at the end of the year)
A target company (ungeared) has a cost of $50M, funded by:
- Senior debt (70%)
- Mezannine debt (20%)
- Equity (10%)
Interest and tax rates:
- Senior debt = 12% p.a. (on a reducing basis)
- Mezannine debt = 15% p.a. interest only plus 15% ownership share of
business at the end of 4 years
- Corporate tax rate = 36%
Cashflow forecasts
- EBIT = $11.5M in year 1, then 2% growth in EBIT per annum
Depreciation = $2M per annum
Investment expenditure = $2M per annum
Business (geared) sold at the end of year 4 at an exit PE multiple
of 7 times Year 4 Profit After Tax
%3D
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