Question: Read the attached case "Ducati and Texas Pacific Group". The purchase of Ducati is a leveraged buyout. Thus, the level of debt in the companys capital structure will change drastically from Lit. 280 billion (initial 2:1 debt-to-equity in 1996) to zero in 2003 as debt is repaid. Given the changing capital structure, it is best to use the Capital Cash Flow method of valuation. We want you to value Ducati. a. Capital Cash Flows and terminal value are discounted at the cost of unlevered equity (rU). i. Cost of Unlevered Equity (rU) = rf + MRP ii. Risk free rate (rf) = 6.74% (from Exhibit 15a) iii. Assume Market Risk Premium (MRP) of 7.5% iv. To estimate beta of unlevered equity, use equity beta of comparable companies in Exhibit 4. The only good comparable is Harley Davidson. Both BMW and Honda manufacture motorcycles but it is only a small part of their business. Harley Davidsons equity beta is 1.09. Since the company has no debt, this is also the beta of unlevered equity. b. Estimate Free Cash Flows. i. Forecast period is from 1996 to 2003. ii. Exhibit 9a has EBIT projections. iii. Tax rate is 53.5% iv. Exhibit 9b has forecasts of CAPEX, depreciation and amortization v. Working capital projections are in the working capital sheet in the Ducati Excel spreadsheet. c. Exhibit 9a also provides you with forecast of net interest expense. Interest tax shields equal forecasted net interest expense tax rate (53.5%). d. Terminal value: Estimate terminal value in 2003 by multiplying terminal EBITDA with an EBITDA multiple. Assume that your exit EBITDA multiple would be the same as your purchase EBITDA multiple (i.e. there is no multiple expansion). To get the purchase EBITDA multiple, note that the purchase price for Ducati assets and brand is Lit. 380 billion. (Although TPG plans to raise a total of 420 billion for this transaction (senior debt of Lit. 280 billion and an equity contribution of Lit. 140 billion), transactions cost consume Lit. 40 billion, suggesting that the true purchase price for Ducati assets and brand is Lit. 380 billion.) Ducatis 1995 (pre-transaction) EBITDA was Lit. 60.4 billion. Therefore the purchase EV/EBITDA multiple was 6.3x (380/60.4).