Reading 47: Private Equity Valuation-LOS m 习题精选 center, border, class, div

土豆妮

Session 13: Alternative Asset Valuation
Reading 47: Private Equity Valuation

LOS m: Explain the role of cash sweep in an LBO transaction.

 

 

 

A cash sweep in an LBO transaction is the:

A) excess profit paid out to the general partner.

B) excess profit paid out to the limited partners.

C) excess cash used to pay down debt.

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A cash sweep refers to the excess cash from an LBO that is used to pay down debt. Typically senior debt is paid down first, followed by junior debt based on seniority.

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Which of the following correctly identifies how an increase in the cash sweep affects the cash balance in an LBO and how it affects equityholders’ claim on the LBO investment’s assets, respectively?

Cash balance

Equityholders’ claim on assets

A) No effect Increases

B) Decreases Increases

C) No effect No effect

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Cash sweep is the excess cash flow from an LBO that is used to pay down debt (in order of seniority). Since the LBO’s cash balance is set by contract, a cash sweep would have no effect on the cash balance.

An increase in the cash sweep reduces debt and thus increases the equity investors’ claim on an LBO investment’s assets.

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If the cash balance in an LBO is set constant by contract, and the LBO pays out all of its net income in dividends, how does a cash sweep affect equityholders’ claim on assets? Equity holders’ claim on assets:

A) remains unchanged.

B) increases.

C) decreases.

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Since the cash balance is set constant by contract, the cash sweep is used to pay down the LBO’s debt. Thus, debt falls. In the unusual scenario when the entire net income is used to pay dividends, the equity component remains unchanged. A reduced debt balance coupled with unchanged equity means that equity increases relative to debt and equity holders’ claim on assets also increases.