• Acquisition at the end of 1997 with an entry multiple of 5.8 times the 1997 EBITDA for 100% of the shares
  60% leverage at a weighted average interest rate of 11%.
  37.5% corporate tax rate
  Exit in three years after the acquisition, during which:
  revenues grew at an annual rate of 5%
  cost was reduced at an annual rate of 6%
• 
  ·     All intermediate cash flows were used to reduce debt principal
  
  ·     An exit value of 6.4 times EBITDA at the time of exit.
  
  ·     No change in the USD Italian Lira exchange rate.
  
  a.     What is the total return on the original equity investment (i.e. the multiple of money return, e.g. 1.5x or 3.5x, etc.)? Assess this return given the risks involved.
  
  b.     Break up the total equity return by its three major components: (
• 1) value generated from the economic improvement of the business or EBITDA growth 
• (2) value unlocked by de-leveraging and 
• (3) multiple expansion. 
• Comment on the numbers.

Answer rating: 100% (QA)

ANSWER To calculate the total return on the original equity investment we need to first calculate the exit ... View the full answer