Use the following question to complete the question $2-5$

A private equity fund has produced the following forecasts for a potential target fora LBO prior to the LBO $($pre$-$LBO$).$ Data are in millions of dollars.

Sep$-30-$

$2016$E

Sep$-30-$

$2017$E

Sep$-30-$

$2018$E

Sep$-30-$

$2019$E

Sep$-30-$

$2020$E

EBIT

$150$

$154\mathrm{.}5$

$159\mathrm{.}14$

$163\mathrm{.}91$

$168\mathrm{.}83$

Interest

$65$

$65$

$65$

$65$

$65$

Net Income

$68\mathrm{.}00$

$71\mathrm{.}60$

$75\mathrm{.}31$

$79\mathrm{.}13$

$83\mathrm{.}06$

Depreciation

$90$

$92\mathrm{.}7$

$95\mathrm{.}48$

$98\mathrm{.}35$

$101\mathrm{.}3$

Operating cash flow

$158\mathrm{.}00$

$164\mathrm{.}30$

$170\mathrm{.}79$

$177\mathrm{.}48$

$184\mathrm{.}36$

Capital expenditures

$-100\mathrm{.}00$

$-103\mathrm{.}00$

$-106\mathrm{.}09$

$-109\mathrm{.}27$

$-112\mathrm{.}55$

Dividend payments

$-30$

$-30$

$-30$

$-30$

$-30$

Share repurchases

$-30$

$-30$

$-30$

$-30$

$-30$

Change in cash

$-2\mathrm{.}00$

$1\mathrm{.}30$

$4\mathrm{.}70$

$8\mathrm{.}21$

$11\mathrm{.}81$

Note: I am assuming that tax rate is $20\%,$ so net income $=($EBIT $$Interest$)*(1-20\%).$

Question $2$

Which option is correct?

Question $2$ options:

The interest coverage ratio for this target is close to $4.$

Since this target company is profitable, it is probably not a very good candidate for an LBO.

The private equity fund can increase this company's ability to support additional debt by reducing dividend payments and share repurchases.

None of the above options is correct.

Question $3$

The private equity fund is considering a proposal to finance this acquisition with $1$B in new debt and $500$M in equity from the private equity fund. The new debt will come from a new bank loan at an interest rate of $6\%.$ The private equity fund has estimated that it can increase the company's EBIT by $10\%$ starting in $2018.$ The private equity fund is also reducing dividends and share repurchases to zero starting in $2016.$ Other forecasts are unchanged.

The total interest payment following the acquisition will be $\_\_\_\_\_\_\_\_.$

Question $3$ options:

Question $4$

Which option is correct?

Question $4$ options:

The private equity fund should consider issuing bonds instead of bank debt to save on interest payments.

The private equity fund has improved the company's cash generation by using equity instead of financing the acquisition with $1\mathrm{.}5$B in debt.

The equity invested by the private equity fund will require the company to pay a dividend.

All of the above are correct.

Question $5$

Assume now that the private equity fund has estimated that it can increase the company's EBIT by $15\%$ starting in $2017.$ The private equity fund is also reducing dividends and share repurchases to zero starting in $2016.$ Other forecasts are unchanged.

Which option is not correct?

Question $5$ options:

The company is generating very little cash until $2018.$

The interest coverage is now lower than $2.$

The company will not be able to reduce its debt load until several years in the future.

The company will have a low risk of financial distress following the LBO.