It is December 2022 and a private equity group called Paramount is considering a leveraged buyout of Grid Iron Inc. Grid Iron Inc. generated $4.5 billion in revenue in 2021. Revenue is expected to grow at 8% for five years. As an analyst at Paramount, you have obtained the following additional assumptions for Grid Iron for the next five years

 

You can copy and paste this table to Excel

5-year revenue growth forecast	8%
Operating expense (% of sales)*	68%
Tax rate	20%
Capex (% of sales)	5%
Depreciation (% of sales)	3%
Working capital (% of sales)	5%
Shares outstanding (millions)	850
Cash balance	0

*Including depreciation expense

 

In addition, you have the following information about the LBO

 

• The purchase multiple will be 4x EBITDA
• The acquisition will be financed with 25% equity and 75% debt. The LBO debt financing will be a term loan that carries an interest rate of 6%
• The debt covenants require that half of the free cash flow to equity holders generated each year must be used to pay down the term loan principal. The rest of the cash flow can be disbursed to equity holders each period
• The private equity group expects to exit the investment at 5x EBITDA

 

Answer the following questions

 

1. What is the value of equity at exit? 
2. What is the IRR earned by the LBO? 

Please provide Excel formulas or screenshots

Answer rating: 100% (QA)

To calculate the value of equity at exit and the Internal Rate of Return IRR earned by the Leveraged ... View the full answer