PECO just acquired TargetCo for $90M. The transaction is financed with $60M of outside debt and...

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PECO just acquired TargetCo for $90M. The transaction is financed with $60M of outside debt and the rest with PECO's capital. Cost of debt is 5%. PECO plans to pay down debt aggressively over the next 4 years using TargetCo's cash flows and then exit at the end of year 4 via an equity sale. After year 4, debt is assumed to remain at the same level forever. TargetCo's EBIT and debt for the next 4 years are shown in the table below. Annual capex is assumed to be the same as the depreciation expense. There is no incremental NWC investment going forward. TargetCo's unlevered cost of capital is 10%. Tax rate 30%. Long-term growth g = 0 after year 4. If PECO can exit at the end of year 4 (after debt pay down) based on an EV/NOPAT(Y4) multiple of 12, what would be PECO's IRR for this buyout deal? Assume TargetCo has little cash on the balance sheet at the end of year 4, and PECO will not receive any dividend distribution from TargetCo in years 1-4. Year EBIT Debt: end of year (after debt pay down) 60.00 10 55.10 11 49.33 3 12 42.65 13 35.05 PECO just acquired TargetCo for $90M. The transaction is financed with $60M of outside debt and the rest with PECO's capital. Cost of debt is 5%. PECO plans to pay down debt aggressively over the next 4 years using TargetCo's cash flows and then exit at the end of year 4 via an equity sale. After year 4, debt is assumed to remain at the same level forever. TargetCo's EBIT and debt for the next 4 years are shown in the table below. Annual capex is assumed to be the same as the depreciation expense. There is no incremental NWC investment going forward. TargetCo's unlevered cost of capital is 10%. Tax rate 30%. Long-term growth g = 0 after year 4. If PECO can exit at the end of year 4 (after debt pay down) based on an EV/NOPAT(Y4) multiple of 12, what would be PECO's IRR for this buyout deal? Assume TargetCo has little cash on the balance sheet at the end of year 4, and PECO will not receive any dividend distribution from TargetCo in years 1-4. Year EBIT Debt: end of year (after debt pay down) 60.00 10 55.10 11 49.33 3 12 42.65 13 35.05

Answer rating: 100% (QA)

Here are the stepbystep calculations 1 Calculate TargetCos NOPAT each year Year 1 EBIT 10 NOPAT EBIT ... View the full answer