1. What are the characteristics of a good potential target company for a Leveraged Buyout (LBO)? Explain why.
2. Calculate the Internal Rate of Return (IRR) of the following LBO transaction:

Transaction value: $1,000,000,000

Debt: $700,000,000+($100,000xA) (with A defined above)

Equity: ?

Assume that in the exit year (year 5):

Cumulative cash available for debt repayment: $275,000,000 EBITDA: $200,000,000+($100,000xA) (with A defined above)

EBITDA multiple: 9

3. Given the following information of the industry and an LBO firm, calculate beta each year from year 1 to year 3 of the firm:

		Year 1	Year 2	Year 3
Industry average	Levered beta	1.5	1.4	1.2
	D/E	1.1	0.9	0.8
Firm	D/E	4	3	2
For both firm and industry	Tax rate	24%+(1%xA)	24%+(1%xA)	24%+(1%xA)

A: defined above