Question 9. [16 points total]

The PE firm Circle LP bought a tire manufacturer, TireStone Co, 2 years ago in a leveraged buyout (LBO). At the time of the LBO, TireStone generated revenue of $150 million and EBITDA of $15 million, and Circle LP paid an 8x EV/EBITDA multiple for TireStone. Prior to the LBO, TireStone had zero net debt.

KPM Bank provided a loan to finance 50% of the LBO. At the time of the LBO, the loan had a 4-year maturity, but it can be repaid in advance with no penalty. The annual interest rate on the loan is 15%, and at maturity (or if the loan is repaid in advance) the principal amount must be repaid in full in a balloon payment (thus, the size of the final balloon payment equals the initial size of the loan).

During the 2 years since the LBO, TireStones revenue and EBITDA have grown at an annual growth rate of 20%. TireStones CEO expects a more modest 15% growth during the following 2 years.

a) What IRR and multiple of invested capital (MoIC) will Circle LP generate if it sells TireStone 4 years after the LBO at an expected 9x EV/EBITDA multiple? [6 points]

b) Circle LP has just received an unexpected offer to sell TireStone today. What IRR and MoIC will Circle LP generate if it sells TireStone today at the same 8x EV/EBITDA multiple at which it invested? [5 points]

c) What is Circle LPs expected IRR as of today of not selling TireStone now and instead sticking to its original plan of selling TireStone 4 years after the LBO at an expected 9x EV/EBITDA multiple? [5 points]