An LBO group is making an offer to purchase a target company. The company's current stock price is $9.50 per share, and the company has 250 million shares outstanding; the company currently has EBITDA equal to $550 million, a price­to-earnings ratio equal to 16, and an enterprise value-to-EBITDA multiple equal to 5.25. After considering the company's expected performance and alternative strategies to the LBO transaction the LBO sponsor decided to make an offer with an enterprise value equal to 6.25x EBITDA. The company has 50 million stock option outstanding, all with an exercise price equal to $7.50.

In addition to redeeming the existing stock and options, the financial sponsor will redeem all outstanding debt (par value of $400 million) and preferred stock (par value of $100 million) at their par values (all of which are equal to their book values). Total M&A fees will equal $160 million. The sponsor intends to finance this transaction by using $250 million in excess cash held by the company (the company has a total of $350 million in cash and marketable securities), issuing various debt securities equaling $2.5 billion in value, with the remaining balance with an equity contribution by the LBO sponsors. The company will have 500 million post-transaction shares outstanding. 

 

a. Calculate the purchase price per target shares the LBO sponsors should offer. 

b. The LBO sponsors estimate that the acquisition has an exit potential in 5 years with a 6.5x EBITDA exit multiple, and EBITDA in 5 years at $600 million and net debt expected at $2.0 billion after debt repayment during the 5 year period. What is the IRR of the acquisition?