The Return of Leveraged Buyout Suppose that you are an experienced entrepreneur. At the end of 2019, you consider to acquire a struggling business, SUFE One, who does not have any liability. Its 2019 revenues and expenses are shown in the provided spread sheet. The 2019 depreciation of $100 is associated with the firm's historical long-term investments. The same amount will incur each year throughout the analysis. The fair market value of SUFE One's assets, which is also the acquiring price, is estimated to be $2000. But you only have $600 available to invest. Fortunately, the University Board is convinced to lend you the rest of funds needed at the annual interest rate of 8%. Clearly, this acquisition will result in a highly levered company. And we typically call such transaction leveraged buyout or LBO. Please answer the questions in the following scenarios, given the income tax rate for is always 33%. 1) After the LBO, what are the amounts of debt and equity shown on the balance sheet of the new company? 2) Suppose that you plan to expand the business in 2020 by investing $100 in PPE. This investment depreciates over a 12-year period. As a result, the gross margin and operating expenses will both increase by 8%. What is the net income of 2020? (Hint: the total depreciation is the sum of the $100 from historical investments and the depreciation from the new investment. The interest expense is the charge based on the debt balance at the end of 2019.) Compared with 2019, does the change of net income reflect that of the operational profitability? 3) In the rest of the exercise, suppose you keep the company until the end of 2024. You plan to increase the PPE investment by 8% each year, all of which depreciates over 12 years. Due to these investments, the business keeps growing. In particular, the gross margin and operating expenses also increase 8%% each year. What are the EBIT for these years? 4) Suppose the cash flow from operations each year is firstly used to fulfill the scheduled PPE investment. The rest of the cash flow is to repay the outstanding debt. Now calculate the cash from operations in 2020 using the indirect method, and the 2020 debt balance. Apply this new debt balance to calculate the 2021 interest expense and net income. Then repeat these calculations each year until 2024. What are the net incomes and equity book values for these years? What is the average yearly return on equity (net income divided by previous equity)? 5) At the end of year 2024, you sell the business assets and evaluate the return of this LBO. The ratio of the assets' market value (also the selling price) to EBIT is the same as in 2019 when you