Question $1$ PE fund Red Llama buys a company

$($

with no existing debt or cash

$)$

$$for $

$500$

$$million$,$ at a purchase EBITDA multiple of

$10\mathrm{.}0$

x

$.$

$$Considering the financing, they figure they need to keep an interest coverage ratio of

$1\mathrm{.}8$

$$post buyout. At that level the cost of debt is

$7\mathrm{.}4$

$\%$

$.$

$$They borrow up to their debt capacity. At the end of the

$3$

$-$

year period, they sell the company at an exit EBITDA multiple of

$12\mathrm{.}0$

x

$.$

$$However$,$ EBITDA has not changed at all. Capital expenditure and working capital investment are minimal and there is no dividend payment. All free cash flows are used to pay down debt. As a result, PE fund has paid off $

$60$

$$million worth of debt during the

$3$

$-$

year period.

What

$$

s the EBITDA of Red Llama?

a

$.$

$40$

b

$.$

$50$

c

$.$

$60$

d

$.$

$80$

$$

QUESTION

$2$

PE fund Red Llama buys a company

$($

with no existing debt or cash

$)$

$$for $

$500$

$$million$,$ at a purchase EBITDA multiple of

$10\mathrm{.}0$

x

$.$

$$Considering the financing, they figure they need to keep an interest coverage ratio of

$1\mathrm{.}8$

$$post buyout. At that level the cost of debt is

$7\mathrm{.}4$

$\%$

$.$

$$They borrow up to their debt capacity. At the end of the

$3$

$-$

year period, they sell the company at an exit EBITDA multiple of

$12\mathrm{.}0$

x

$.$

$$However$,$ EBITDA has not changed at all. Capital expenditure and working capital investment are minimal and there is no dividend payment. All free cash flows are used to pay down debt. As a result, PE fund has paid off $

$60$

$$million worth of debt during the

$3$

$-$

year period.

Calculate Maximum Interest Capacity:

a

$.$

$18\mathrm{.}63$

b

$.$

$39\mathrm{.}21$

c

$.$

$27\mathrm{.}78$

d

$.$

$90$

$$

QUESTION

$3$

PE fund Red Llama buys a company

$($

with no existing debt or cash

$)$

$$for $

$500$

$$million$,$ at a purchase EBITDA multiple of

$10\mathrm{.}0$

x

$.$

$$Considering the financing, they figure they need to keep an interest coverage ratio of

$1\mathrm{.}8$

$$post buyout. At that level the cost of debt is

$7\mathrm{.}4$

$\%$

$.$

$$They borrow up to their debt capacity. At the end of the

$3$

$-$

year period, they sell the company at an exit EBITDA multiple of

$12\mathrm{.}0$

x

$.$

$$However$,$ EBITDA has not changed at all. Capital expenditure and working capital investment are minimal and there is no dividend payment. All free cash flows are used to pay down debt. As a result, PE fund has paid off $

$60$

$$million worth of debt during the

$3$

$-$

year period.

Calculate the maximum debt capacity:

a

$.$

$266\mathrm{.}7$

b

$.$

$375\mathrm{.}4$

c

$.$

$516\mathrm{.}2$

d

$.$

$400\mathrm{.}9$

$$

QUESTION

$4$

PE fund Red Llama buys a company

$($

with no existing debt or cash

$)$

$$for $

$500$

$$million$,$ at a purchase EBITDA multiple of

$10\mathrm{.}0$

x

$.$

$$Considering the financing, they figure they need to keep an interest coverage ratio of

$1\mathrm{.}8$

$$post buyout. At that level the cost of debt is

$7\mathrm{.}4$

$\%$

$.$

$$They borrow up to their debt capacity. At the end of the

$3$

$-$

year period, they sell the company at an exit EBITDA multiple of

$12\mathrm{.}0$

x

$.$

$$However$,$ EBITDA has not changed at all. Capital expenditure and working capital investment are minimal and there is no dividend payment. All free cash flows are used to pay down debt. As a result, PE fund has paid off $

$60$

$$million worth of debt during the

$3$

$-$

year period.

Calculate the equity investment amount by the PE fund at the time of purchase.

a

$.$

$124\mathrm{.}6$

b

$.$

$234\mathrm{.}3$

c

$.$

$99\mathrm{.}1$

d

$.$

$500$

$$

QUESTION

$5$

PE fund Red Llama buys a company

$($

with no existing debt or cash

$)$

$$for $

$500$

$$million$,$ at a purchase EBITDA multiple of

$10\mathrm{.}0$

x

$.$

$$Considering the financing, they figure they need to keep an interest coverage ratio of

$1\mathrm{.}8$

$$post buyout. At that level the cost of debt is

$7\mathrm{.}4$

$\%$

$.$

$$They borrow up to their debt capacity. At the end of the

$3$

$-$

year period, they sell the company at an exit EBITDA multiple of

$12\mathrm{.}0$

x

$.$

$$However$,$ EBITDA has not changed at all. Capital expenditure and working capital investment are minimal and there is no dividend payment. All free cash flows are used to pay down debt. As a result, PE fund has paid off $

$60$

$$million worth of debt during the

$3$

$-$

year period.

At the end of the

$3$

$-$

year period, PE fund

$$

s Equity Investment in the portfolio firm is worth:

a

$.$

$224\mathrm{.}6$

b

$.$

$184\mathrm{.}6$

c

$.$

$600$

d

$.$

$284\mathrm{.}6$

$$

QUESTION

$6$

PE fund Red Llama buys a company

$($

with no existing debt or cash

$)$

$$for $

$500$

$$million$,$ at a purchase EBITDA multiple of

$10\mathrm{.}0$

x

$.$

$$Considering the financing, they figure they need to keep an interest coverage ratio of

$1\mathrm{.}8$

$$post buyout. At that level the cost of debt is

$7\mathrm{.}4$

$\%$

$.$

$$They borrow up to their debt capacity. At the end of the

$3$

$-$

year period, they sell the company at an exit EBITDA multiple of

$12\mathrm{.}0$

x

$.$

$$However$,$ EBITDA has not changed at all. Capital expenditure and working capital investment are minimal and there is no dividend payment. All free cash flows are used to pay down debt. As a result, PE fund has paid off $

$60$

$$million worth of debt during the

$3$

$-$

year period.

Which of the following is correct about the return of this investment?

a

$.$

IRR is

$32$

$\%$

b

$.$

IRR is

$28$

$\%$

c

$.$

Cash to cash return is

$3\mathrm{.}28$

X

d

$.$

Cash to Cash return is

$5\mathrm{.}16$

X