Reading 48: Private Equity Valuation- LOS n～ Q1-4 capital

youzizhang

 

LOS n: Calculate and explain free cash flow forecasts in a leveraged buyout (LBO) transaction.

Q1. The effect of capital expenditures in an LBO on cash flow and cash sweep, respectively, is:

                Cash flow                       Cash sweep

 

A)     Increase                           Decrease

B)     Decrease                         Increase

C)     Decrease                         Decrease

 

Q2. An investor gathered the following information about a leveraged buyout (LBO) for 2008:

• Net income of $13.5 million.
• Depreciation expense of $5.2 million.
• Amortization of deferred charges of $450,000.
• Reinvested depreciation of $5.2 million.
• Decrease in net working capital of $1 million.
• No new capital expenditure for the year.

The LBO’s cash flow for the year is:

A)   $1.65 million.

B)   $14.95 million.

C)   $12.95 million.

 

Q3. When calculating the cash flows of a leveraged buyout investment from net income, the effect on cash flows of reinvested depreciation and a decrease in net working capital (NWC), respectively, is:

           Reinvested depreciation                     Decrease in NWC

 

A)       Decrease                                             Increase

B)       Decrease                                            Decrease

C)      Increase                                                Decrease

 

Q4. A private equity investor gathered the following information about a leveraged buyout (LBO) for 2008:

• Net income of $6 million.
• Depreciation expense of $2.9 million.
• Amortization of deferred charges of $100,000.
• Reinvested depreciation of $2.9 million.
• Increase in net working capital of $1 million.
• New capital expenditures of $700,000.

The LBO’s cash flow for the year is (in millions):

A)   $4.2.

B)   $6.2.

C)   $4.4.

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