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 with equal annual payments made 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 equal annual principal repayments made 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.

1. 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

2.What is the total interest paid for the entire 4 years? $ 945,000 $ 998,000 $ 1,086,000 $ 1,130,000 $ 1,283,000

3.Net earnings (NE) made in year 4 is: $ 1,987,000 $ 2,317,000 $ 2,819,000 $ 3,120,000 $ 3,370,000

4.The Equity/Asset ratio at the end of Year 4 will be: 60% 70% 80% 90% 100%

5.The share price offered based on your analysis is: $ 50 $ 80 $ 120 $ 140 $ 160