1. Company M has Assets of R160m which are financed entirely by Equity i.e. the company has no debt.

A Private Equity company wishes to do Leverage Buy-out to acquire the assets of Company M. Assume the following:

• Company M has an average Earning Before Tax (EBT) of R20m
• Company M is subject to a tax rate of 28%
• The Private Equity Firm wishes to finance the purchase of Company M with 75% debt and 25% equity.
• Assume interest on debt is 10% p.a.

By how much would the private Equity Firm'sYield on the investment using Leverage exceed the Yield if the acquisition was made with cash only?