(a) Company A purchased a company B for 685m at the end of 2007 entirely in equi
ID: 2645170 • Letter: #
Question
(a) Company A purchased a company B for 685m at the end of 2007 entirely in equity. In 2008, the company generated 150m net income and post tax profit grew 8% a year through year end 2012. The company B paid 40% of net income each year in taxes to Company A. Company B was sold at the end of 2012 for 12.0x2012 net income.what is Company A's IRR on the initial equity investment?
Follow up of part (a)
(b) If Company A financed half of its 685m initial investment with debt and this debt had a 4% interest rate, what is Company A's IRR on the initial equity investment? Tax rate is 35%, assume dividend ratio pay out is the same and equity value upon sale is 10.0x2012 net income.
20072008 150 007 2008 2009 2010 2011 2012 Net Incom 685 Dividends Final Net-685 90.00 97.20 104.98 113.37 122.44 1,469.33 162 174.96 188.9568 204.0733 60.00 64.8069.98 75.58 81.63 24% 1,469.33 0.78125 0.610352 0.476837 0.372529 0.291038 0.291038305 70.31 59.33 50.06 42.2435.64 427.63 685.20Explanation / Answer
Total Discounted cash flow = 70.31 + 59.33 + 50.06 + 42.24 + 35.64 + 427.63 = 685.20
IRR = 685.20 / 685 = 1
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