Scribd
Upload
153 views

Exercises LBO

This document contains two exercises related to corporate finance and leveraged buyout (LBO) valuations. The first exercise provides financial information for Charlotte and comparable companies, and asks the student to calculate capital cash flows and determine the equity value MacroCapitales should pay for Charlotte. The second exercise provides financial projections for Gold Gym and asks the student to determine the price Smart Fitness should pay for Gold Gym's equity and calculate the expected internal rate of return if Smart Fitness buys Gold Gym for $100 million equity offering $20 million debt in 2021.

Uploaded by

Rafael Lizana Zúñiga
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
153 views

Exercises LBO

This document contains two exercises related to corporate finance and leveraged buyout (LBO) valuations. The first exercise provides financial information for Charlotte and comparable companies, and asks the student to calculate capital cash flows and determine the equity value MacroCapitales should pay for Charlotte. The second exercise provides financial projections for Gold Gym and asks the student to determine the price Smart Fitness should pay for Gold Gym's equity and calculate the expected internal rate of return if Smart Fitness buys Gold Gym for $100 million equity offering $20 million debt in 2021.

Uploaded by

Rafael Lizana Zúñiga
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 2

UNIVERSIDAD DEL PACIFICO

CORPORATE FINANCE II
PROFESSOR: VICTOR TORRES

EXERCISES
1. Assume today is December 31st, 2018, and you are evaluating the LBO acquisition of
Charlotte by MacroCapitales Fund.

You have the following market data from comparable companies:

Debt /
Comparable Companies Levered Beta Equity Tax Rate Debt Beta
Company Mercado 0.900 0.3333 30% 0.005
Company Nestum 2.500 3.0000 35% 0.100
Company People Lunch 3.000 4.0000 30% 0.150

Assume you have the following information on Charlotte in thousands of US$:

2018 2019 2020 2021


EBITDA 300.0 400.0 500.0 600.0
Tax Rate 40.0% 40.0% 40.0% 40.0%
CAPEX 70.0 100.0 80.0 60.0
Depreciation 30.0 40.0 40.0 40.0
Net Working Capital 50.0 60.0 70.0 80.0

At the end of 2018, the Debt before the LBO is US$ 500 thousands.
The Debt at the beginning of 2019 (after LBO) is US$ 1 million.

The interest rate on the debt is expected to remain at a 10% annual rate.

The expected long-term growth rate of the free cash flows and of the interest expenses is
1%. The tax rate will also remain at 40%.

Assume that the company is planning to use 50% of all cash available in each year to repay
its Debt. The other 50% will be distributed to shareholders in each year. There is no Excess
Cash in the Balance Sheet.

Finally, consider that the risk-free rate is 3.0%, and the Market Risk Premium is 7.0%.

a) Calculate the Capital Cash Flows for the forecasted years.


b) Determine the Equity Value that MacroCapitales should pay for all 100% the shares of
Charlotte at the end of 2018.
UNIVERSIDAD DEL PACIFICO
CORPORATE FINANCE II
PROFESSOR: VICTOR TORRES

2. Assume that “Smart Fitness” was considering to acquire “Gold Gym” firm through an LBO
deal, and assume that today is December 31st, 2017. Consider the following information:

(in thousands US$) 2018 2019 2020 2021


Gross Profit 8,563 9,248 9,988 10,345
EBIT 6,547 7,071 8,346 9,732
EBITDA 5,678 6,466 7,745 9,340
Cash Flows from Operations 5,923 6,666 7,479 8,232
Cash Flows from Investing -100 -552 -450 -600
Interest Expense 300 350 250 200
Capital Cash Flows 5,543 6,053 6,890 7,451
Free Cash Flows to Firm 5,123 5,690 6,345 6,976
Equity Cash Flows 1,523 1,845 2,108 2,567
Gym Members (thousands) 250 300 350 400

Risk-free rate = 3.0% Cost of Debt in USD = 7%


Market Risk Premium = 6.0% Beta of Assets = 0.8
Tax rate = 40% Enterprise Value / Book Value of Assets = 3.5x
Debt in 2017 (net = US$ 10 million Price / Earnings = 13.1x
Expected LBO Debt / Equity for Gold Gym = 8 Enterprise Value / Gym Members = 400x
Actual Debt / Equity for Gold Gym (Book Value) = 0.2

a) What price should Smart Fitness pay for Gold Gym’s equity?
b) If “Smart Fitness” was considering to buy “Gold Gym” offering US$ 100 million for the
Equity, and the Debt in 2021 is estimated to be equal to US$ 20 million. What is the
expected IRR of this deal?

You might also like