On December 30, 2013: Company Y trades at $10 per share Enterprise Value / EBITD

Question

On December 30, 2013: Company Y trades at $10 per share Enterprise Value / EBITDA multiple of 5.0x Leverage ratio of 0.6x (Net debt/EBITDA) 2013 EBITDA = $2.0 billion Assume no cash on company Y's balance sheet On December 31,2013: Company Y undergoes an LBO and is recapitalized The company's new leverage ratio becomes 5.0x Financial sponsor exit is planned for Year 5. Assume that the EV/ EBITDA multiple at exit year is the same as the current multiple. Required rate of return is 25% Exit year EBITDA projected to be $3.0 billion The company's year-end leverage ratio is 1.6x What is the initial Equity Value? $9.0 billion $8.8 billion $7.6 billion $8.0 billion On December 30,2013: Company Y trades at $10 per share Enterprise Value / EBITDA multiple of 5.0x Leverage ratio of 0.6x (Net debt/EBITDA) 2013 EBITDA = $2.0 billion Assume no cash on company Y's balance sheet On December 31,2013: Company Y undergoes an LBO and is recapitalized The company's new leverage ratio becomes 5.0x Financial sponsor exit is planned for Year 5. Assume that the EV/ EBITDA multiple at exit year is the same as the current multiple. Required rate of return is 25% Exit year EBITDA projected to be $3.0 billion The company's year-end leverage ratio is 1.6x How much debt is paid down by the exit year (since the LBO announcement)? $6.4 billion $5.2 billion $6.2 billion $5.6 billion On December 30,2013: Company Y trades at $10 per share Enterprise Value / EBITDA multiple of 5.0x Leverage ratio of 0.6x (Net debt/EBITDA) 2013 EBITDA = $2.0 billion Assume no cash on company Y's balance sheet On December 31,2013: Company Y undergoes an LBO and is recapitalized The company's new leverage ratio becomes 5.0x Financial sponsor exit is planned for Year 5. Assume that the EV/ EBITDA multiple at exit year is the same as the current multiple. Required rate of return is 25% Exit year EBITDA projected to be $3.0 billion The company's year-end leverage ratio is 1.6x What is the initial equity necessary to achieve the rate of return required by the financial sponsors? $4.95 billion $3.34 billion $3.15 billion $3.80 billion

Explanation / Answer

1 c

2 b

3 d

4 c

5 a

6 b

7 b

8 a

9 c

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