Professional Documents
Culture Documents
Giddy Partners is considering the leveraged buyout of a small private forestry company.
The cost of the buyout including expenses is estimated at
$6,500,000
The company's revenue in the current year is
$3,600,000
Current operating expenses before depreciation are
$2,200,000
Revenue and operating expenses are projected to grow at
9.0%
per year for the next 5 years and after that, at a steady rate of
3.0%
In the current year, capital expenditures are
$125,000
and depreciation is
$100,000
Both are expected to grow at the same rate as revenue for five years, and to
be equal to one another after that.
Working capital change as a percentage of revenue is
4%
Discussions with lenders suggest that the LBO can be financed with this capital structure:
Debt
$4,500,000
Equity
$2,000,000
The debt would be provided in the form of a fixed-rate amortizing term loan from banks,
while the equity would come 10% from management and 90% from the LBO firm.
The interest rate on the debt would reflect a rating of
B
(See rating table below)
The intent of Giddy Partners is to pay down the debt at the annual rate of
$300,000
during the next 5 years, after which the remaining debt will be refinanced.
The beta of the firm is estimated to be
The risk-free rate of interest is
The market risk premium is assumed to be
The firm's overall marginal tax rate is
3.7
4.5%
5.50%
35%
Spread is
14.0%
12.7%
11.5%
10.0%
8.0%
2
2.5
3
3.5
4.5
6
7.5
9.5
12.5
Table 2
2.500
3.000
3.500
4.500
6.000
7.500
9.500
12.5
100000
B
B+
BB
BBB
AA
A+
AA
AAA
6.5%
4.8%
3.5%
2.3%
2.0%
1.8%
1.5%
1.0%
0.8%
Financial Projections
Revenues
Operating expenses
Depreciation
EBIT
Interest
Tax
Net Income
Year 1
3,600,000
(2,200,000)
(100,000)
1,300,000
(495,000)
(281,750)
523,250
Year 2
3,924,000
(2,398,000)
(109,000)
1,417,000
(462,000)
(334,250)
620,750
Year 3
4,277,160
(2,613,820)
(118,810)
1,544,530
(429,000)
(390,436)
725,095
Year 4
4,662,104
(2,849,064)
(129,503)
1,683,538
(396,000)
(450,638)
836,900
Year 5
5,081,694
(3,105,480)
(141,158)
1,835,056
(363,000)
(515,220)
956,836
Terminal Year
5,234,145
(3,198,644)
(145,393)
1,890,108
(330,000)
(546,038)
1,014,070
=
-
+
=
+
=
+
=
Definitions
Revenues
Operating expenses
Depreciation
EBIT
Interest
Tax
Net Income
EBIT
Depreciation
EBITDA
EBIT*(1-T)
Depreciation
Cap Ex
Chg in working cap
FCFF
Interest*(1-T)
Principal repayment
New debt issued
Preferred dividends
FCFE
Example
3,600,000
(2,200,000)
(100,000)
1,300,000
(495,000)
(281,750)
523,250
1,300,000
100,000
1,400,000
845,000
100,000
(125,000)
(144,000)
676,000
(321,750)
(300,000)
54,250
Example assumptions
Revenues
Expenses
Growth rate
Stable growth rate
Depreciation
Cap Ex
Working capital change, % of rev
Tax rate
Initial debt
Initial equity
Annual principal repayment
Riskfree rate
Initial credit spread
Interest rate
Initial equity beta
Market risk premium
Target debt/equity ratio
$3,600,000
$2,200,000
9%
3%
$100,000
$125,000
4%
35%
4,500,000
$2,000,000
300,000
4.5%
6.5%
11%
3.7
5.50%
1.30
3.70
35%
2.25
1.50
1.50
35%
2.25
3.70
LBO Calculations
Example
Definitions
Revenues
Operating expenses
Depreciation
EBIT
Interest
Tax
Net Income
EBIT
Depreciation
EBITDA
EBIT*(1-T)
Depreciation
Cap Ex
Chg in working cap
FCFF
Interest*(1-T)
Principal repayment
New debt issued
Preferred dividends
FCFE
Year 1
3,600,000
(2,200,000)
(100,000)
1,300,000
(495,000)
(281,750)
523,250
1,300,000
100,000
1,400,000
845,000
100,000
(125,000)
(144,000)
676,000
(321,750)
(300,000)
54,250
Year 2
3,924,000
(2,398,000)
(109,000)
1,417,000
(462,000)
(334,250)
620,750
1,417,000
109,000
1,526,000
921,050
109,000
(136,250)
(156,960)
736,840
(300,300)
(300,000)
###
###
136,540
Year 3
4,277,160
(2,613,820)
(118,810)
1,544,530
(429,000)
(390,436)
725,095
1,544,530
118,810
1,663,340
1,003,945
118,810
(148,513)
(171,086)
803,156
(278,850)
(300,000)
224,306
Year 4
4,662,104
(2,849,064)
(129,503)
1,683,538
(396,000)
(450,638)
836,900
1,683,538
129,503
1,813,041
1,094,300
129,503
(161,879)
(186,484)
875,440
(257,400)
(300,000)
###
###
318,040
Beginning debt
- Principal repayment
+ New debt issued
= Outstanding debt
Beginning equity
+ Net Income
= Outstanding equity
Total capitalization
4,500,000
(300,000)
4,200,000
2,000,000
523,250
2,523,250
6,723,250
4,200,000
(300,000)
###
3,900,000
2,523,250
620,750
3,144,000
7,044,000
3,900,000
(300,000)
3,600,000
3,144,000
725,095
3,869,095
7,469,095
3,600,000
(300,000)
###
3,300,000
3,869,095
836,900
4,705,994
8,005,994
3,300,000
(300,000)
3,000,000
4,705,994
956,836
5,662,830
8,662,830
3,000,000
3,000,000
5,662,830
1,014,070
6,676,901
9,676,901
1.66
2.08
1.78
3.7
1.24
1.81
1.78
3.21
0.93
1.60
1.78
2.85
0.70
1.46
1.78
2.59
0.53
1.34
1.78
2.39
0.45
1.29
1.78
2.30
4.5%
24.9%
4.5%
22.2%
4.5%
20.2%
4.5%
18.7%
4.5%
17.6%
4.5%
17.1%
4.5%
3.0%
4.9%
4.5%
6.5%
7.2%
4.5%
6.5%
7.2%
4.5%
6.5%
7.2%
4.5%
6.5%
7.2%
4.5%
6.5%
7.2%
13.56%
13.67%
12.82%
12.18%
11.71%
11.49%
=
-
+
=
+
=
+
=
D/E
1+(1-T)D/E
BetaUL
BetaL
Riskfree rate
Cost of equity
Riskfree rate
Credit spread
After-tax Cost of debt
WACC
Terminal Value FCFF
Terminal Value FCFE
PV FCFF
SUM PV FCFF
PV FCFE
SUM PV FCFE
595,281
9,354,643
43,452
4,082,753
570,803
551,487
535,831
522,827
12,006,471
9,006,471
6,578,413
89,528
122,372
146,139
163,378
3,517,885
Example assumptions
Revenues
Expenses
Growth rate
Stable growth rate
Depreciation
Cap Ex
Working capital change, % of rev
Tax rate
Initial debt
Initial equity
Annual principal repayment
Riskfree rate
Initial credit spread
Interest rate
Initial equity beta
Market risk premium
Target debt/equity ratio
$3,600,000
$2,200,000
9.0%
3.0%
$100,000
$125,000
4.0%
35%
$4,500,000
$2,000,000
$300,000
4.5%
6.5%
11.0%
3.70
5.5%
1.30
Leverage Progress
1
4.5
2
2
4.2
2.52325
1400000
495000
2.83
1526000
462000
3.30
Debt ($m)
Equity ($m)
EBITDA
Interest
Coverage Ratio
3
4
5
3.9
3.6
3.3
3.144 3.869095 4.705994
1663340
429000
3.88
1813041
396000
4.58
1976214
363000
5.44
6
3
5.66283
2035501
330000
6.17
2
Debt ($m)
3
Equity ($m)
Coverage Ratio
1
676000
321750
300000
54250
2
3
4
5
736840 803155.6 875439.6 954229.2
300300
278850
257400
235950
300000
300000
300000
300000
136540 224305.6 318039.6 418279.2
FCFF
Principal repayment
4
Interest*(1-T)
FCFE
6
1019204
214500
0
804704.3