Reading 47: Private Equity Valuation-LOS n 习题精选 2010, companies, following, private, return

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

LOS n: Explain how private equity firms manage their exit routes in LBO companies.

 

 

 

 

 

Which of the following is the least likely source of return for the private equity owners of a leveraged buyout investment (LBO)?

A) Dividends.

B) Recapitalization.

C) Private sale.

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The private equity investors in an LBO generally do not receive dividends from the LBO. Their return is realized only at the time the LBO is sold or liquidated through an IPO, private sale, or recapitalization.

Recapitalization is the restructuring of a company’s debt and equity mixture, such as issuing stock to repay debt and to increase equity capital.

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An analyst reads the following comment in the business section of a national newspaper: “Leveraged buyout investments (LBOs) realize their return at exit by terminating the fund. Projecting the terminal value for an LBO can be done either through a multiple of sales or earnings or through discounting free cash flow.”

The comment on estimating an LBO’s terminal value from sales or earnings multiples and from discounting free cash flow, respectively, is:

Sales or earnings multiple

Discounting free cash flow

A) Correct Correct

B) Incorrect Correct

C) Correct Incorrect

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The newspaper comment is correct with respect to both sales or earnings multiples and discounting free cash flow to project the terminal value of an LBO. Earnings multiples can include multiples of EBIT or net income, generally under a range of scenarios (e.g., conservative, likely, and aggressive).

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The Mnoyan fund is a leveraged buyout (LBO) fund with initial capital of $100 million, of which $90 million is provided by the LBO fund and $10 million by management. Profits between the fund and management are split 80% and 20%, respectively.

The fund uses an EBIT multiple for projecting terminal value. The fund is liquidated after year 4 with an operating income of $50 million in year 4 and an EBIT multiple of 10 under the most likely scenario. The fund’s debt is worth $120 million at exit.

The return at exit to management as measured by IRR is closest to:

A) 66%.

B) 40%.

C) 36%.

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The fund’s terminal value is calculated using the EBIT multiple (all in millions):

Proceeds at exit: Operating income (EBIT) × EBIT multiple = $50 × 10 = $500

Net proceeds are proceeds at exit less debt value:

Proceeds at exit: $500 ? $120 = $380

The fund’s share of the profit is 80%, or $304. Management receives 20% of profits, or $76.

With an initial investment of $10 and a terminal value after four years of $76, the return to management is an IRR of 66%:

PV = -$10; FV = $76; N = 4; CPT I/Y = 0.66