Your client ABC, a large public company ( $5 billion market capitalization, $2 billion of recent debt issued with a yield of 3.5\%), is contemplating the acquisition of company XYZ for $100 million cash. As part of the transaction, ABC structured a contingent consideration whereby ABC will pay to the XYZ's equity holders (the sellers) an additional cash payment that will be dependent on XYZ's future EBITDA over the twelve-month period following the transaction. A simplified deal model showing financial projections for XYZ is as follows. Assume no cash flows after year 5 . USD in millions As part of your preliminary research, you have found 4 public comparable companies for XYZ and have the following information. The contingent consideration was initially negotiated as 25% of EBITDA (e.g., if XYZ's future 12-month EBITDA is $100 million, ABC will pay $25 million to the seller). 1. Assuming no contingent consideration, and using the XYZ's financial projections, calculate the transactions internal rate of return (IRR). 2. Discuss whether the value of the contingent consideration should be included as part of the purchase price, and how would the IRR calculation change if the value of the contingent consideration is included in the purchase price? 3. Discuss the advantages and disadvantages of structuring a contingent consideration as part of a transaction. 4. Based on the projections provided, the expected contingent consideration payoff is $5.5 million. Discuss the risk factors that an investor would consider when deciding to purchase the contingent consideration as a separate financial instrument (it may be helpful to compare the risk of the contingent consideration versus the risk of the entire business of XYZ). 5. Estimate the fair value of the contingent consideration and discuss the proposed methodology. The contingent consideration was ultimately structured as 2.5x the excess 1st year EBITDA earned above \$20 million up to a maximum payment of \$25 million (e.g. if XYZ's future 12month EBITDA is $25 million, ABC will pay $12.5 million to the seller). 6 . Discuss how the addition of the threshold and payment cap changes the risk profile of the contingent consideration. 7. Estimate the fair value of the contingent consideration considering at least the following items/variables: expected EBITDA, payoff structure, and estimated risk and volatility of EBITDA. Note that the approach and model should be consistent with the model in