Delta Co is considering a leveraged buyout of Gamma LLC. Gamma can be acquired for 5 times EBITDA (LTM). Delta expects to be able to sell Gamma at 5.5 times EBITDA (LTM) after four years at the end of 2027. The buyout will be financed with 70% debt. The interest on the debt is 9% and the principal will be repaid using all cash that is available for debt repayment each year. Any remaining debt will be repaid when Gamma is sold off by Delta after four years.

The financial year (2023) has just concluded for Gamma and Delta. In 2023, Gammas sales were $90 million. Gammas sales are expected to grow by 10% in 2024, and 3% thereafter. Gammas EBIT margin was 35% in 2023, and that is expected to continue for at least four years. Gammas depreciation in 2023 was $4.5 million. Gammas existing net plant, property, and equipment as of the end of 2023 is $50 million, and this will be depreciated to zero in 10 years, using the straight-line method. Gamma will incur capital expenditures of around 5% of sales each year. These capital expenditures will also be depreciated to zero in 10 years using the straight-line method. Gamma needs to maintain working capital of 20% of sales. Gammas interest expenses are calculated on the ending balance of the previous years debt. Gammas tax rate is 40% and will have no cash right after the buyout. All cash flows occur at the end of the year, including capital expenditures. (Note that this means the depreciation expenses corresponding to capital expenditures in a particular year will start from the following year.) What is the expected IRR from this leveraged buyout?

A. 35.33% B. 32.46% C. 34.23% D. 33.97%