A private equity fund (PE) wants to acquire company Co. The following projections in millions are used
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Question:
A private equity fund (PE) wants to acquire company Co. The following projections in millions are used to value Co:
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Revenues | 200 | 210 | 220 | 230 | 240 |
Costs | 100 | 105 | 110 | 115 | 120 |
EBIT | 100 | 105 | 110 | 115 | 120 |
Change in NWC | 3 | 3 | 4 | 4 | 5 |
Also:
- Co is financed 80% with equity (E) and 20% with debt (D). The interest rate on the debt is 8%.
- The tax rate is 40%
- Appropriate beta of Co is assumed to be 0.8
- Capital expenditure: 10 million each year from year 1 to year 5
- Depreciation: 6 million each year from year 1 to year 5
- Treasury yields for 10-year bonds are 7%
- The market risk premium is 7.5%
- After year 5, EBIT is expected to grow 3% per year in perpetuity
How much PE should pay for 100% of the shares of Co?
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