Gabriella Boucher, the CEO of Prestige Outlets, a specialty retailing store, believes that she can take the company private via an LBO. Exit would occur in 3 years.

 

Prestige currently has 5 million shares trading at $8 which will have to be purchased at a premium of 25% for the LBO to go through. Prestige is currently is an all-equity company.

 

The following finance information has been obtained :

 

-  Senior debt in the amount of $25 million at a coupon rate of 9% which is also the market yield on such debt.

 

- Junior funds in the amount of $15 million with a coupon rate of 5%. The market rate for such investment is 18%. The junior investors will also receive an equity kicker to make up the short fall in the coupon rate.

 

- Outside equity investors will supply $10 million and require an annual rate of 60%. No dividends will paid prior to exit.

-Ms. Boucher will retain the remaining equity.

 

Assume the following: 

·        At exit in year 3 all assets (except cash) will be sold for an EBIDTA multiple of 5.
·       Interest rate on cash balances is 0%
·       Depreciation = CAPEX for all years.
·       NWC = 0 for all years.
·       Tax rate = 40%
·       It was agreed that the exit would occur in year 3 at a value of 5× year 3 EBIDTA.
The following is the 3-year forecasts:

Year	1	2	3
Revenue	62.42	75.41	85.81
EBIDTA	8.74	15.44	17.35
Depreciation	0.62	0.67	0.73

 

(a)	If the total number of common equity shares issued at the beginning of the LBO is 1,000, what is the number of shares issued to each of the equity investors?
(b)	Repeat (a) above assuming that the senior debt requires annual 'cash sweep'. All other information is the same; in particular, the rate on senior debt and forecasts etc. are the same.

Answer rating: 100% (QA)

Calculate the number of shares issued to each equity investor in the LBO Given data Total number of ... View the full answer