EXERCISES AND PROBLEMS

P15.1 Sources and Uses, Capital Structure, and Deal TermsT. Burrus Company: A group of managers is

making an offer to purchase the company they managethe T. Burrus Company. The companys current stock

price is $12 per share, and the company has 250 million shares outstanding; the company has a current price-

to-earnings ratio equal to 14.37 and a firm-value-to-EBITDA multiple equal to 5.25. Management owns 12.5

million shares of the outstanding stock. After considering the companys expected performance and alternative

strategies to the LBO transaction (including alternative acquisition offers), the deal premium is set at 20%.

The company has no convertible debt or convertible preferred stock, but it does have 50 million stock options

outstanding, all with an exercise price equal to $7.20.

In addition to redeeming the existing stock and options, management and its financial sponsor will

redeem all outstanding debt (par value of $300 million) and preferred stock (par value of $100 million) at

their par values (all of which are equal to their book values). Initial fees will equal $161.1 million (3% for the

debt financing, 1% to the sponsor, and 0.5% for other fees). These fees do not include fees for a revolver loan.

The sponsor intends to finance this transaction by using $141 million in excess cash held by the company,

issuing various debt securities equaling $3.19 billion, investing $750 million of its own equity, and having

management invest $240.1 million in equity from rollover equity and new investment. The composition of the

$3.19 billion in debt is $1.39 billion of 7-year, 7.0% senior secured bank debt; $880 million of 9-year, 11%

subordinated unsecured debt; and $920 million of 10-year, 13% mezzanine debt, which has an equity kicker

equal to 4% of the fully diluted post-LBO shares. In addition, the company is arranging a $400 million revolv-

ing line of credit that has a five-year term, a 4% interest rate on the amount drawn, and a 0.5% annual fee on

the total amount of the line of credit. Management has an equity kicker equal to 4.3% of the fully diluted

post-LBO shares. The sponsor plans to use $200.0 million from the revolver to finance the transaction. The

company will have 500 million post-transaction shares outstanding.

Calculate the purchase price of the equity and prepare a sources and uses schedule similar to the one in

Exhibit 15.10.