Assume the firm, called XYZ, is acquired for $220 (the price for the assets = ne
ID: 2707084 • Letter: A
Question
Assume the firm, called XYZ, is acquired for $220 (the price for the assets = new invested capital) by a private equity firm. The private equity firm issues substantial debt to buy the firm, which leads to a high cost of equity and debt; although, it hopes to improve the firm and earn a high ROE and return on capital to compensate for this added risk.
Values of firm XYZ before acquisition
$100 Sales
$18 EBIT (18% of sales)
$4 Interest (4% interest rate on debt)
$14 EBT
40% Tax rate
$8.4 Net income
$200 Assets = invested capital
$100 Debt
$100 Equity
8.40% ROE (net income / equity)
5.40% ROIC (NOPAT / invested capital)
8.00% Cost of equity
2.40% After-tax cost of debt
5.20% WACC (using book values)
0.20% EVA (i.e., ROIC
Explanation / Answer
PARTICULARS
AMONNT ($)
SALES
105
EBIT [20% OF SALES]
21
INTEREST
[(100*4%) + (100*12%)]
16
PBT [ EBIT
PARTICULARS
AMONNT ($)
SALES
105
EBIT [20% OF SALES]
21
INTEREST
[(100*4%) + (100*12%)]
16
PBT [ EBIT
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