Gooey Oil is a small oil company engaged in the exploration, development and production of oil and gas. Gooey Oil's management and an equity sponsor is evaluating a LBO. Banks are willing to lend on a secured basis equal to 35% of total debt and require that 25% of the purchase price to be equity. They would require their loan to be fully amortized over 5 years. Subordinated lenders would provide 65% of the total debt with interest payable annually and all principal due at end of 5 years. The sponsor requires a 25% IRR. Gooey Oil's projected its future cash flow and found it was possible to borrow $745 million and meet the lender's requirements: the senior debt of $261 million would be fully amortized over 5 years and there would be sufficient cash flow to pay the interest on the subordinated debt of $484 million. Debt balances at end of 5th year are projected at $0 for senior debt, $484 million subordinated debt, and a cash balance of $14 million is projected at end of 5th year. The projection shows EBITDA increasing from $152 million in year 1 of the forecast to $231 million in year 5 of the forecast. The sponsor believes that the LBO group could exit at the end of the 5th year and the Enterprise value at time of exit would be equivalent to a EBITDA multiple of 6.3 calculated on the projected EBITDA for year 6. Year 6 EBITDA is projected at 8% higher than year 5 EBITDA.

a) What is the estimated equity value at time of exit?

b) In order to satisfy the lender's requirement, the sponsor needed to provide equity at least equal to 25% of the total purchase price. Given the debt capacity of $745 million, what would be the total purchase price assuming the sponsor contributed equity equal to 25% of total price?

c) Assuming a $1,045 million purchase price and a $745 million borrowing, what would be the IRR to the equity sponsors?