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Given
Assets (Invested Capital)
Borrowing rate
Return on Invested Capital
Good state
Bad state
Capital Structures
Alternative #1
Alternative #2
Solution Lege
$
1,500,000.00
9.00%
12.00%
4.00%
Debt/Assets
30.00%
50.00%
Solution
Alternative #1
Net Operating Income
less: Interest Expense
Net Income
Return on Equity
Alternative #2
Net Operating Income
Less: Interest Expense
Net Income
Return on Equity
Return on Assets
12.00%
4.00%
Good State
Bad State
Good State
Bad State
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
PROBLEM 10-2
Solution Legend
Given
Financing
% Equity
Solution
a. Post-money value
b. Pre-money value
4,000,000.00
40%
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
PROBLEM 10-3
Solution Legend
Given
EBITDA (0)
Growth rate in EBITDA
VC Required rate
VC Investment
Multiple
Solution
EBITDA (5)
Enterprise Value (5)
VC required $
% VC ownership
750,000.00
30%
40%
1,000,000.00
5
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
PROBLEM 10-4
Given
Capital needed
Projected EBITDA in year 5
Exit year
EBITDA sales multiple in year 5
Interest bearing debt in year 5
Total debt in year 5
Cash in year 5
Solution Legend
$
$
$
$
$
500,000
1,050,000
5
6.00 times
1,000,000
1,200,000
200,000
45%
35%
10%
Year
Cash to Conv Debt
0
(500,000)
40%
8%
40%
Solution
Year
Cash Investment
Dividends
Redemption Value
Share of Equity Value - warrant price
Total Cash Flows
IRR--Preferred Investor Return
d.
0
(500,000)
500,000
PROBLEM 10-5
Given
EBITDA 2009
Added EBITDA
Funding need
VC's required rate
Rate on convertible debt
Term
EBITDA multiple
EBITDA growth rate
Solution Legend
$ 4,000,000
1,000,000
5,800,000
25.0%
8.0%
5 years
5
20.0%
Solution
a. What is the value of the combined firm in five years?
Estimated EBITDA
EBITDA 2009
Estimated EBITDA 2014
Multiple
5
Enterprise Value
Less: Debt
$ (5,800,000)
Equity Value in 2014
b. What share of the firm's equity will the VC require?
VC's Cash Flows
Year
Cash Flows
0
(5,800,000)
1
2
3
4
5
Year 5 Conversion Value
VC Rate of Return
VC's Share
c. What share of the firm's equity will the VC require?
Estimated EBITDA
EBITDA 2009
Estimated EBITDA 2010
Multiple
5
Enterprise Value
Less: Debt
$ (5,800,000)
Equity Value in 2014
VC's share
Solution Legend
given in problem
la/Calculation/Analysis required
ative analysis or Short answer required
eek or Solver cell
Ball Input
Ball Output
PROBLEM 10-6
Given
Capital needed
Projected EBITDA in year 5
Exit year
EBITDA sales multiple in year 5
Interest bearing debt in year 5
Cash in year 5
Solution Legend
500,000
1,500,000
5
6.00 times
1,000,000
200,000
Simulation
times
49.00%
10.00%
30.00%
40.00%
8.00%
$
100,000
40.00%
Year
Cash Investment
Dividends
Redemption Value
Share of Equity Value
Total Cash Flows
Alt#3. Targeted Investor Return
c.
0
(500,000)
500,000.00
PROBLEM 10-7
Given
Target EBITDA sales multiples
EBITDA (Year 5)
Funds raised
Cash (Year 5)
Interest bearing debt (year 5)
Investment horizon for VC
Solution Legend
6.00
1,200,000
500,000
300,000
2,000,000
5 years
$
$
$
$
$
7.00
Ownership %
60.00%
40.00%
45.00%
Solution
a. Enterprise valuation
6 times multiple
EBITDA x EBITDA Multiple
Plus: Cash
Enterprise value
Less: Interest Bearing Debt
Equity Value in year 5
300,000
300,000
(2,000,000)
(2,000,000)
e.
7 times multiple
(500,000.00)
(500,000.00)
PROBLEM 10-8
Solution Legend
Given
2014
$
$
$
$
$
Estimated EBITDA
EBITDA Multiple
Capital Costs
Senior debt
Sub-debt--Interest
Sub-debt--Conversion % of equity
Convertible Preferred Stock--Dividend yield
Convertible Preferred Stock--Required rate of return
100,000
150,000
250,000
200,000
100,000
200,000
750,000
250,000
1,000,000
$
$
300,000
200,000
250,000
450,000
400,000
100,000
800,000
1,750,000
250,000
2,000,000
650,000
6.00
10.00%
12.00%
10.00%
8.00%
45.00%
Solution
a.
EBITDA
Multiple
EBITDA value
Plus: Cash
Enterprise value
Less: Interest bearing debt (Short term notes plus senior debt)
Equity value
650,000
6.00
b.
Sub-debt interest income
Conversion value of the sub-debt
Estimated IRR of Sub-debt (6 years)
c.
Convertible Preferred Stock Dividends (annual)
Required equity conversion value to produce desired rate of return
Required equity ownership percentage
Final Deal Structure (Equity)
Sub-Debt Holders
Convertible Preferred Stockholders
Dub Tarun
Equity Ownership %
d.
e.
Post-money value estimate (2009)
Less: Preferred Stockholder investment
Pre-money value estimate (2009)
(250,000)
Rate of Return
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
10,000,000.00
10.00%
30.00%
10 years
3,500,000.00
90.00%
4,000,000.00
5 times
5 times
Capital Costs
Interest Rate on Debt
Unlevered Beta
Risk free rate
Market equity risk premium
Unlevered Cost of Equity
14.00%
- (calculated)
5.00%
5.50%
0.00% (calculated)
Industry LBO Model Valuation
Year
1
2
3
4
5
Firm Selling Price
Equity Value (EOY 5)
Equity Investment
Rate of Return on Equity
EBITDA
Less: Capital
Expenditures
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
Depreciation
Expense
Note: Corporate taxes are considered in calculating debt repayments (interest paid before tax and principal repaid using a
equity is after corporate but before personal tax. The after-tax return would reflect the tax circumstances of the investor.
EBIT
Less: Interest
Earnings before Taxes
Less: Taxes
Net Income
#VALUE! $
#VALUE! $
#VALUE!
#VALUE! $
Security Valuation (Enterprise Value = multiple of estimated EBITDA, Debt value = book and Equ
Year
0
1
2
Debt
Equity
Firm Value
#VALUE! $
(4,000,000.00)
Year
2
-
(4,000,000.00)
Company
Company A
Company B
Company C
Company D
Unlevered Cost of Equity
APV Valuation
PV(OCFs) Planning Period
PV(ITS) Planning Period
PV (TV of firm)
Firm Value
Less: Debt
Equity Value
NPV of the Acquisition
ation
Purchase Price
Interest
Principal
Payment
Loan Balance
2013
-
2014
-
$
$
$
$
$
$
CF
on Analysis
Year
3
4
-
(4,000,000.00)
5
-
(4,000,000.00)
(4,000,000.00)
Equity Capital
ty Beta
Debt to Equity
29.77%
43.95%
34.20%
26.15%
11,000,000.00
10.00%
30.00%
10 years
3,500,000.00
90.00%
4,000,000.00
5 times
5 times
Capital Costs
Interest Rate on Debt
Unlevered Beta
Risk free rate
Market equity risk premium
Unlevered Cost of Equity
14.00%
- (calculated)
5.00%
5.50%
0.00% (calculated)
Industry LBO Model Valuation
Year
1
2
3
4
5
Firm Selling Price
Equity Value (EOY 5)
Equity Investment
Rate of Return on Equity
EBITDA
Less: Capital
Expenditures
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
Note: Corporate taxes are considered in calculating debt repayments (interest paid before tax and principal repaid using a
after corporate but before personal tax. The after-tax return would reflect the tax circumstances of the investor.
EBIT
Less: Interest
Earnings before Taxes
Less: Taxes
Net Income
$
$
Year 5
Debt
Equity
Firm
#VALUE!
(4,000,000.00)
Company
Company A
Company B
Company C
Company D
Unlevered Cost of Equity
APV Valuation
PV(OCFs) Planning Period
PV(ITS) Planning Period
PV (TV of firm)
Firm Value
Less: Debt
Equity Value
NPV of the Acquisition
Analysis:
The reduction in
operating expenses by
$1million per year has
the effect of increasing
the firm's EBITDA by a
like amount.
Interest
Loan Balance
Principal Payment
Harvest Multiple
n balance EOY 5
paid before tax and principal repaid using after-tax earnings). However, the return on equity is
x circumstances of the investor.
2013
-
2014
-
#VALUE! $
#VALUE! $
#VALUE!
#VALUE! $
$
$
$
$
imated EBITDA, Debt value = book and Equity value = residual value)
Year
2
3
4
3
-
(4,000,000.00)
4
-
(4,000,000.00)
5
-
(4,000,000.00)
(4,000,000.00)
Unlevered Beta
answer required
10,000,000.00
30%
10 years
3,500,000.00
90%
Results of simulation s
bottom. The mean IRR
median IRR is 52.11%
chance that the IRR wi
required returns of 40%
4,000,000.00
5 Times
Times
14%
5.00%
5.50%
Industry LBO Model Valuation
Year
1
2
3
4
5
Firm Selling Price
Equity Value (EOY 5)
Equity Investment
Rate of Return on Equity
EBITDA
Less: Capital
Expenditure
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
Depreciation
Expense
Note: Corporate taxes are considered in calculating debt repayments (interest paid before tax and princip
earnings. However, the return on equity is after corporate but before personal tax. The after-tax return wo
circumstances of the investor.
Security Valuation (Enterprise Value = multiple of estimated EBITDA, Debt value = book and E
0
1
2
Debt
Equity
Firm Value
Evaluation of IRR on the Platform Company Investment
Year
0
Debt
Equity
Firm
Internal Rates of Return (IRR) on LBO Firm's Equity Investment
Equity (with debt)
Company
Company A
Company B
Company C
Company D
Unlevered Cost of Equity
APV Valuation
PV(OCFs) Planning Period
PV(ITS) Planning Period
PV (TV of firm)
Firm Value
Less: Debt
Equity Value
NPV of the Acquisition
Solut
Growth distribution
Min
Likely
Max
0.00%
10.00%
15.00%
O Model Valuation
Purchase Price
Interest
Loan Balance
Principal Payment
Growth
0.00%
Flows
Year
4
f Equity Capital
uity Beta
Debt to Equity
Marginal Tax Rate
29.77%
30%
43.95%
30%
34.20%
30%
26.15%
30%
Average
Unlevered Beta
1.16
1.34
1.17
1.04
1.18
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
Average
Year 5