You are considering buving a company using leveraged buyout. The company is proj

Question

You are considering buving a company using leveraged buyout. The company is projected to have sales of 500 million each year in the three years after buyout. The cost of sales and other administrative expenses are 60% of the sale. Depreciation and amortization are 5% of the sale. Tax rate is 40%. Suppose that the change in net working capital and capital expenditure each year is zero. If you borrow 1.5 billion at interest rate of 8% per year, and you use all the cash flow to repay debt. 1. What is the EBITDA in the first year after the buyout? 2. What is the interest expense in the first year after the buyout? 3. What is the net income in the first vear after the buvout?

Explanation / Answer

1. Revenue- 500 million

Sales and other expenses= 60% of 500 = 300 million

Depriciation & amorotization = 5% of 500 = 25 million

so, EBITDA = (500-325)= 175 Million

2.Interest expenses= 8% of 1.5 billion = 120 Million

3. Net income= 60% of (175-120) = 33 Million.

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