VANS is a privately owned manufacturer of light trailers that are sold to rental
ID: 2790742 • Letter: V
Question
VANS is a privately owned manufacturer of light trailers that are sold to rental companies and individuals. Its sole owner, Mr. Benjamin Webster is presently considering a purchase offer from Prentice Works. The offer for the equity of VANS is as follows:
A cash payment for $5 million due at closing.
A 7.5% annual coupon five-year subordinated note issued by Prentice Works, for $7 million with principal payable at maturity.
An earnout agreement stipulating a payment to take effect at the end of the third year equal to one-half times third year EBITDA.
Prentice Works will assume VANS’s present net debt of $14.8 million. Furthermore, VANS will become a wholly owned subsidiary of Prentice and Mr. Webster will stay as its president with a three-year contract and competitive compensation, at the end of which he will retire.
The following additional information is available:
Prentice Works’ outstanding subordinated notes are presently priced to yield 10%.
Mr. Webster believed that he could make VANS’s EBITDA grow at 11% per year during the following three years. Current EBITDA is $6 million.
Small companies with characteristics similar to VANS have a WACC of about 14%.
What is the value of the 7.5% $7 million note offered by Prentice Works?
What is the value of the earnout agreement?
How much is Prentice Works offering for the enterprise (debt plus equity) of VANS? What is the initial EBITDA multiple offered by Prentice?
Explanation / Answer
a)
value of 7.5% & million note
here coupon payment = (7.5/100) * 7,000,000
= 525000
yield = 10%
years to maturity = 5 years
Hence we can use the financial calculator
N = 5, I/Y = 10%, PMT = 5,25,000, FV = 7,000,000, PV =?
Compute for PV
we get 6,336,612.32
which is the present value of the note
b)
EBITDA (present value ) = 6 million
EBITDA growth rate = 11%
EBITDA at year 1 = 6 * (1.11) = 6.66 million
EBITDA at year 2 = 6.66 * 1.11 = 7.3926 million
EBITDA at year 3 = 7.3926 * 1.11 = 8.205786 million = 8,205,786
Value of the earnout aggrement at the end of 3rd year
Note: as mentioned in the question- Earnout agreement stipulating a payment to take effect at the end of the third year equal to one-half times third year EBITDA.
Value of the earnout aggrement at the end of 3rd year = 1.5 * 8,205,786 = 12,308,679
WACC as given 14%
Hence the present value of the earnout aggrement is
(Value of the earnout aggrement at the end of 3rd year) / (1+WACC) ^3
= 12,308,679/ (1.14) ^ 3
= 8,308,007
c)
we need to calculate the total cash involved,
that is the offering price of Prentice works.
(cash due at closing) + price of the note + present value of earnout aggrement
= 5,000,000 + 6,336,612 + 8,308,007 = 19,644,619
Hence now we now need to calculate the EBITDA multiple
current EBITDA = 6 million
total price = 19,644,619
EBITDA multiple = total price / current EBITDA = 19,644,619 / 6,000,000 = 3.27
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