Senior management of Company ABC is contemplating launching a "LBO" on the company whose shares are currently underperforming due to chronic lack lustre sales. It is currently trading at $12/share while, 2 years ago, its value was 3 times that. Senior management projects that, if the IBO takes place:

• sales will grow by 20% per year for the next 2 years from its current level of $10MM annually, then settle at a constant rate of 6% from year 3 onwards.
• variable cost is at 60% of sales and fixed cost is a constant $1.5MM per year
• depreciation is a constant $800,000 per year
• working capital is tied to the level of sales and is estimated to be 5% of change of sales
• because of increasing sales, management estimates that $500,000 per year of additional fixed asset are required for the first 2 years of operation, then $100,000 per year thereafter.

The proposed financing scheme is given below:

• 80% debt
• 20% equity

80% Debt Financing

• 60% of which is from a financial institution at a rate of 6% to be amortized over 4 years withequal annual paymentsmade at the end of each year
• 40% of which is from a private placement at a rate of 9% to be amortized over 4 years with equalannual principal repaymentsmade at the end of each year

Senior management has also to assume the outstanding long term debt of $1.5MM, one-third of which has to be redeemed at the end of the second year. Its average interest rate is 7%.

ABC Co has 300,000 shares outstanding and the Board will not accept any offer less than a 40% premium.

ABC Co has a corporate tax rate of 30% and senior management will use a 14% discount rate to evaluate the project.

How much of the total financing should come from debt?

$ 3,820,000

$ 3,970,000

$ 4,032,000

$ 4,210,000

$ 4,320,000

What is the total interest paid for the entire 4 years?

$ 945,000

$ 998,000

$ 1,086,000

$ 1,130,000

$ 1,283,000

Net earnings (NE) made in year 4 is:

$ 1,987,000

$ 2,317,000

$ 2,819,000

$ 3,120,000

$ 3,370,000

The Equity/Asset ratio at the end of Year 4 will be:

60%

70%

80%

90%

100%

The share price offered based on your analysis is:

$ 50

$ 80

$ 120

$ 140

$ 160