Consider the simple LBO model shownin the attached image for the cash$-$free, debt$-$free leveraged buyout of a restaurant business that is shifting to a franchise$-$based model to improve its

margin and reduce its capital intensity: The private equity firm reviewing this deal believes that it can achieve this $30\%+$ IRR because of the company's strong EBITDA and FCF growth and the fact that the ROIC nearly triples, even as the revenue and EBITDA growth rates slow down by the end.

Also, it argues that since $49\%$ of the returns come from EBITDA Growth, with only $26\%$ from Multiple Expansion, the assumptions are not overly aggressive. What is the biggest POTENTIAL PROBLEM with these arguments?

A$)$ The assumptions driving the EBITDA and FCF growth are very aggressive, as most companies do not increase their margins by nearly $50\%$ over $5$ years.

B$)$ Multiple Expansion should never contribute to the returns because it's too speculative; this model should assume an Exit Multiple equal to the Purchase Multiple instead.

C$)$ Even with a significantantly higher ROIC, the higher Exit Multiple is not justified because both Revenue Growth decline by year $5.$

D$)$ It's unrealistic for the company to cut its CAPEX by more than $50\%$ and turn its Change in Working Capital into a source of funds as the company's EBITDA nearly doubles.