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LOS q: Explain and calculate the value of the equity investment in an LBO company under the target IRR and equity cash flow methods of valuation.
Q1. A private equity firm estimates that the terminal value of its equity stake in a leveraged buyout (LBO) investment in four years will be $285.61 million. The firm initially funded the LBO with $100 million senior and $180 million junior debt. Management’s initial equity was $7 million and initial transaction costs totalled $9 million.
Using a target IRR of 30%, the firm’s Enterprise Value is closest to (in millions):
A) $364.
B) $378.
C) $100.
Q2. If a firm has debt on its balance sheet, its equity beta will be:
A) lower than its asset beta.
B) higher than its asset beta.
C) the same as its asset beta.
Q3. A private equity investor estimates its terminal equity value in a leveraged buyout (LBO) investment in six years at $220 million. Outstanding total debt at termination is $95 million. It also estimates enterprise beta at 1.0, risk-free rate at 5% and the equity risk premium at 8%. The firm’s equity beta and the present value of the investor’s equity investment at year 5, respectively, is closest to:
Equity beta PV of equity investment at year 5
A) 1.00 $220.00 million
B) 1.43 $210.30 million
C) 1.43 $188.94 million
Q4. The pre- and post-money valuation, and the equity cash flow method, respectively, are most appropriate for valuing:
Pre- and post-money valuation Equity cash flow method
A) Leveraged buyout Venture capital
B) Venture capital Venture capital
C) Venture capital Leveraged buyout | 
发表于 2009-3-10 13:19
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