Question
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,
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]
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started