Senior management of Company ABC is contemplating launching a LBO on the company whose shares are...

 
 
 

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Senior management of Company ABC is contemplating launching a "LBO" on the company whose shares are currently underperforming due to chronic lack lustre sales. It is currently trading at $12/share while, 2 years ago, its value was 3 times that. Senior management projects that, if the IBO takes place: • sales will grow by 20% per year for the next 2 years from its current level of $10MM annually, then settle at a constant rate of 6% from year 3 onwards. • variable cost is at 60% of sales and fixed cost is a constant $1.5MM per year depreciation is a constant $800,000 per year working capital is tied to the level of sales and is estimated to be 5% of change of sales • because of increasing sales, management estimates that $500,000 per year of additional fixed asset are required for the first 2 years of operation, then $100,000 per year thereafter. The proposed financing scheme is given below: 80% debt 20% equity 80% Debt Financing 60% of which is from a financial institution at a rate of 6% to be amortized over 4 years with equal annual payments made at the end of each year • 40% of which is from a private placement at a rate of 9% to be amortized over 4 years with equal annual principal repayments made at the end of each year Senior management has also to assume the outstanding long term debt of $1.5MM, one-third of which has to be redeemed at the end of the second year. Its average interest rate is 7%. ABC Co has 300,000 shares outstanding and the Board will not accept any offer less than a 40% premium. ABC Co has a corporate tax rate of 30% and senior management will use a 14% discount rate to evaluate the project. How much of the total financing should come from debt? (3 marks) O $ 3,820,000 O $ 3,970,000 How much of the total financing should come from debt? (3 marks) $ 3,820,000 O $ 3,970,000 $ 4,032,000 $ 4,210,000 $ 4,320,000 What is the total interest paid for the entire 4 years? (5 marks) O $ 945,000 O $ 998,000 O $ 1,086,000 $ 1,130,000 $ 1.283.000 The Equity/Asset ratio at the end of Year 4 will be: (3 marks) O 60% O 70% 80% 90% O 100% The share price offered based on your analysis is: (3 marks) O $ 50 O $ 80 O $ 120 O $ 140 O $ 160 Senior management of Company ABC is contemplating launching a "LBO" on the company whose shares are currently underperforming due to chronic lack lustre sales. It is currently trading at $12/share while, 2 years ago, its value was 3 times that. Senior management projects that, if the IBO takes place: • sales will grow by 20% per year for the next 2 years from its current level of $10MM annually, then settle at a constant rate of 6% from year 3 onwards. • variable cost is at 60% of sales and fixed cost is a constant $1.5MM per year depreciation is a constant $800,000 per year working capital is tied to the level of sales and is estimated to be 5% of change of sales • because of increasing sales, management estimates that $500,000 per year of additional fixed asset are required for the first 2 years of operation, then $100,000 per year thereafter. The proposed financing scheme is given below: 80% debt 20% equity 80% Debt Financing 60% of which is from a financial institution at a rate of 6% to be amortized over 4 years with equal annual payments made at the end of each year • 40% of which is from a private placement at a rate of 9% to be amortized over 4 years with equal annual principal repayments made at the end of each year Senior management has also to assume the outstanding long term debt of $1.5MM, one-third of which has to be redeemed at the end of the second year. Its average interest rate is 7%. ABC Co has 300,000 shares outstanding and the Board will not accept any offer less than a 40% premium. ABC Co has a corporate tax rate of 30% and senior management will use a 14% discount rate to evaluate the project. How much of the total financing should come from debt? (3 marks) O $ 3,820,000 O $ 3,970,000 How much of the total financing should come from debt? (3 marks) $ 3,820,000 O $ 3,970,000 $ 4,032,000 $ 4,210,000 $ 4,320,000 What is the total interest paid for the entire 4 years? (5 marks) O $ 945,000 O $ 998,000 O $ 1,086,000 $ 1,130,000 $ 1.283.000 The Equity/Asset ratio at the end of Year 4 will be: (3 marks) O 60% O 70% 80% 90% O 100% The share price offered based on your analysis is: (3 marks) O $ 50 O $ 80 O $ 120 O $ 140 O $ 160

Answer rating: 100% (QA)

In various companies the main effect on sales is the chronic lustre on the respective sales This is meant to be the poor sales from the company including the company producing too much to come up with ... View the full answer