senior management of company ABC is contemplating launching an 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 IBO takes place:

sales will grow by 20% per year for next 2 years from its current level of 10 million anually, then settles at a constant rate of 6% growth from year 3 onwards

variable cost is at 60% sales and fixed cost is a constant 1.5 million 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 incresing sales management estimates that 500,000$ per year of additional fixed asset are required for the first 2 years of operation and then 100000$ per year thereafter.

The proposed financing scheme

80% debt financing-20% equity

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 longterm debt of 1.5 million, one third of which has to be redeemed at the end of the second year. it's average int rate is 7%

ABC co has 300000 shares outstanding and the board will not accept any offers less than 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?\

a)4032000 b)3970000 c)4320000 d)4210000 e)3820000

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

a)1130000 b)1283000 c)998000 d)945000 e)1086000

Net earnings made in year 4 is

a)1987000 b)3120000 c)2819000 d)3370000 e)2317000

The equity asset ratio at the end of year 4 is

a)80% b)90% c)100% d)60% e)70%

The share price offered based on your analysis is

a)160$ b)120$ c)80$ d)50$ e)140$