Which of the following statements is the least appropriate?
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As the amortization of debt reduces investor risk (less debt outstanding) and the reduced claim by debtholders can actually magnify investor returns.
[此贴子已经被作者于2011-3-22 15:18:15编辑过]
A private equity firm is guaranteed to receive 80% of the residual value of a leveraged buyout investment, with the remaining 20% owing to management. The initial investment is $500 million, and the deal is financed with 70% debt and 30% equity. The projected multiple is 2.0. The equity component consists of:
Private equity | Management |
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The calculations at exit are as follows (all in million $):
Total initial investment by the private equity firm is $145, and by management $5.
(0.80)($1,000 ? $150 ? $300) = $440.
(0.20)($1,000 ? $150 ? $300) = $110.
Total payoff to the private equity (PE) firm at exit is $440 + $300 = $740.
Payoff multiple for the PE firm is $740 / $145 = 5.10.
Total payoff to management at exit is $110.
Payoff multiple to management is $110 / $5 = 22.0.
Which of the following statements most accurately describes the components of returns on a leveraged buyout (LBO) investment:
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The components of a private equity firm’s returns are the return on preference shares, the increased price multiple and the reduction in debt claims. The private equity firm should see an increase in the price multiples as the operational efficiencies of the LBO firm improve. The second component is the value of the interest-bearing preference shares. The third component is the reduction in debt over the time period to exit.
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