13–16. Assume that, based on similar transactions, an analyst believes that a buyout firm will be able to borrow about 5.5 times first year EBITDA of $200 million

(i.e., about $1.1 billion) and that the buyout firm has a target senior to subordinated debt split of 75 to 25 percent. Further assume that investors in the buyout firm wish to exit the business within eight years after having repaid all of the senior debt. To accomplish this objective, the investors intend to use 100 percent of cash available for debt reduction to pay off senior debt, and the subordinated debt is payable as a balloon note beyond year 8. Using the scenario in the template Excel-Based Model to Estimate Firm Borrowing Capacity on the CD-ROM accompanying this textbook as the base case, answer the following questions:

a. Will the buyout firm be able to exit its investment by the eighth year if sales grow at 3 percent rather than 5 percent assumed in the base case and still satisfy the assumptions in the base case scenario? After rerunning the model using the lower sales growth rate, what does this tell you about the model’s sensitivity to relatively small changes in assumptions?

b. How does this slower sales growth scenario affect the amount the buyout firm could borrow initially if the investors still want to exit the business by the eighth year after paying off 100 percent of the senior debt and maintain the same senior to subordinated debt split?