Given
Assets (Invested Capital)
Borrowing rate
Return on Invested Capital
Good state
Bad state
Capital Structures
Alternative #1
Alternative #2
Solution Lege
$
1,500,000.00
9.00%
12.00%
4.00%
Debt/Assets
30.00%
50.00%
Solution
Alternative #1
Net Operating Income
less: Interest Expense
Net Income
Return on Equity
Alternative #2
Net Operating Income
Less: Interest Expense
Net Income
Return on Equity
Return on Assets
12.00%
4.00%
Good State
Bad State
Good State
Bad State
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
PROBLEM 102
Solution Legend
Given
Financing
% Equity
Solution
a. Postmoney value
b. Premoney value
4,000,000.00
40%
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
PROBLEM 103
Solution Legend
Given
EBITDA (0)
Growth rate in EBITDA
VC Required rate
VC Investment
Multiple
Solution
EBITDA (5)
Enterprise Value (5)
VC required $
% VC ownership
750,000.00
30%
40%
1,000,000.00
5
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
PROBLEM 104
Given
Capital needed
Projected EBITDA in year 5
Exit year
EBITDA sales multiple in year 5
Interest bearing debt in year 5
Total debt in year 5
Cash in year 5
Solution Legend
$
$
$
$
$
500,000
1,050,000
5
6.00 times
1,000,000
1,200,000
200,000
45%
35%
10%
Year
Cash to Conv Debt
0
(500,000)
40%
8%
40%
Solution
Year
Cash Investment
Dividends
Redemption Value
Share of Equity Value  warrant price
Total Cash Flows
IRRPreferred Investor Return
d.
0
(500,000)
500,000
PROBLEM 105
Given
EBITDA 2009
Added EBITDA
Funding need
VC's required rate
Rate on convertible debt
Term
EBITDA multiple
EBITDA growth rate
Solution Legend
$ 4,000,000
1,000,000
5,800,000
25.0%
8.0%
5 years
5
20.0%
Solution
a. What is the value of the combined firm in five years?
Estimated EBITDA
EBITDA 2009
Estimated EBITDA 2014
Multiple
5
Enterprise Value
Less: Debt
$ (5,800,000)
Equity Value in 2014
b. What share of the firm's equity will the VC require?
VC's Cash Flows
Year
Cash Flows
0
(5,800,000)
1
2
3
4
5
Year 5 Conversion Value
VC Rate of Return
VC's Share
c. What share of the firm's equity will the VC require?
Estimated EBITDA
EBITDA 2009
Estimated EBITDA 2010
Multiple
5
Enterprise Value
Less: Debt
$ (5,800,000)
Equity Value in 2014
VC's share
Solution Legend
given in problem
la/Calculation/Analysis required
ative analysis or Short answer required
eek or Solver cell
Ball Input
Ball Output
PROBLEM 106
Given
Capital needed
Projected EBITDA in year 5
Exit year
EBITDA sales multiple in year 5
Interest bearing debt in year 5
Cash in year 5
Solution Legend
500,000
1,500,000
5
6.00 times
1,000,000
200,000
Simulation
times
49.00%
10.00%
30.00%
40.00%
8.00%
$
100,000
40.00%
Year
Cash Investment
Dividends
Redemption Value
Share of Equity Value
Total Cash Flows
Alt#3. Targeted Investor Return
c.
0
(500,000)
500,000.00
PROBLEM 107
Given
Target EBITDA sales multiples
EBITDA (Year 5)
Funds raised
Cash (Year 5)
Interest bearing debt (year 5)
Investment horizon for VC
Solution Legend
6.00
1,200,000
500,000
300,000
2,000,000
5 years
$
$
$
$
$
7.00
Ownership %
60.00%
40.00%
45.00%
Solution
a. Enterprise valuation
6 times multiple
EBITDA x EBITDA Multiple
Plus: Cash
Enterprise value
Less: Interest Bearing Debt
Equity Value in year 5
300,000
300,000
(2,000,000)
(2,000,000)
e.
7 times multiple
(500,000.00)
(500,000.00)
PROBLEM 108
Solution Legend
Given
2014
$
$
$
$
$
Estimated EBITDA
EBITDA Multiple
Capital Costs
Senior debt
SubdebtInterest
SubdebtConversion % of equity
Convertible Preferred StockDividend yield
Convertible Preferred StockRequired rate of return
100,000
150,000
250,000
200,000
100,000
200,000
750,000
250,000
1,000,000
$
$
300,000
200,000
250,000
450,000
400,000
100,000
800,000
1,750,000
250,000
2,000,000
650,000
6.00
10.00%
12.00%
10.00%
8.00%
45.00%
Solution
a.
EBITDA
Multiple
EBITDA value
Plus: Cash
Enterprise value
Less: Interest bearing debt (Short term notes plus senior debt)
Equity value
650,000
6.00
b.
Subdebt interest income
Conversion value of the subdebt
Estimated IRR of Subdebt (6 years)
c.
Convertible Preferred Stock Dividends (annual)
Required equity conversion value to produce desired rate of return
Required equity ownership percentage
Final Deal Structure (Equity)
SubDebt Holders
Convertible Preferred Stockholders
Dub Tarun
Equity Ownership %
d.
e.
Postmoney value estimate (2009)
Less: Preferred Stockholder investment
Premoney value estimate (2009)
(250,000)
Rate of Return
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
10,000,000.00
10.00%
30.00%
10 years
3,500,000.00
90.00%
4,000,000.00
5 times
5 times
Capital Costs
Interest Rate on Debt
Unlevered Beta
Risk free rate
Market equity risk premium
Unlevered Cost of Equity
14.00%
 (calculated)
5.00%
5.50%
0.00% (calculated)
Industry LBO Model Valuation
Year
1
2
3
4
5
Firm Selling Price
Equity Value (EOY 5)
Equity Investment
Rate of Return on Equity
EBITDA
Less: Capital
Expenditures
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
Depreciation
Expense
Note: Corporate taxes are considered in calculating debt repayments (interest paid before tax and principal repaid using a
equity is after corporate but before personal tax. The aftertax return would reflect the tax circumstances of the investor.
EBIT
Less: Interest
Earnings before Taxes
Less: Taxes
Net Income
#VALUE! $
#VALUE! $
#VALUE!
#VALUE! $
Security Valuation (Enterprise Value = multiple of estimated EBITDA, Debt value = book and Equ
Year
0
1
2
Debt
Equity
Firm Value
#VALUE! $
(4,000,000.00)
Year
2

(4,000,000.00)
Company
Company A
Company B
Company C
Company D
Unlevered Cost of Equity
APV Valuation
PV(OCFs) Planning Period
PV(ITS) Planning Period
PV (TV of firm)
Firm Value
Less: Debt
Equity Value
NPV of the Acquisition
ation
Purchase Price
Interest
Principal
Payment
Loan Balance
2013

2014

$
$
$
$
$
$
CF
on Analysis
Year
3
4

(4,000,000.00)
5

(4,000,000.00)
(4,000,000.00)
Equity Capital
ty Beta
Debt to Equity
29.77%
43.95%
34.20%
26.15%
11,000,000.00
10.00%
30.00%
10 years
3,500,000.00
90.00%
4,000,000.00
5 times
5 times
Capital Costs
Interest Rate on Debt
Unlevered Beta
Risk free rate
Market equity risk premium
Unlevered Cost of Equity
14.00%
 (calculated)
5.00%
5.50%
0.00% (calculated)
Industry LBO Model Valuation
Year
1
2
3
4
5
Firm Selling Price
Equity Value (EOY 5)
Equity Investment
Rate of Return on Equity
EBITDA
Less: Capital
Expenditures
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
Note: Corporate taxes are considered in calculating debt repayments (interest paid before tax and principal repaid using a
after corporate but before personal tax. The aftertax return would reflect the tax circumstances of the investor.
EBIT
Less: Interest
Earnings before Taxes
Less: Taxes
Net Income
$
$
Year 5
Debt
Equity
Firm
#VALUE!
(4,000,000.00)
Company
Company A
Company B
Company C
Company D
Unlevered Cost of Equity
APV Valuation
PV(OCFs) Planning Period
PV(ITS) Planning Period
PV (TV of firm)
Firm Value
Less: Debt
Equity Value
NPV of the Acquisition
Analysis:
The reduction in
operating expenses by
$1million per year has
the effect of increasing
the firm's EBITDA by a
like amount.
Interest
Loan Balance
Principal Payment
Harvest Multiple
n balance EOY 5
paid before tax and principal repaid using aftertax earnings). However, the return on equity is
x circumstances of the investor.
2013

2014

#VALUE! $
#VALUE! $
#VALUE!
#VALUE! $
$
$
$
$
imated EBITDA, Debt value = book and Equity value = residual value)
Year
2
3
4
3

(4,000,000.00)
4

(4,000,000.00)
5

(4,000,000.00)
(4,000,000.00)
Unlevered Beta
answer required
10,000,000.00
30%
10 years
3,500,000.00
90%
Results of simulation s
bottom. The mean IRR
median IRR is 52.11%
chance that the IRR wi
required returns of 40%
4,000,000.00
5 Times
Times
14%
5.00%
5.50%
Industry LBO Model Valuation
Year
1
2
3
4
5
Firm Selling Price
Equity Value (EOY 5)
Equity Investment
Rate of Return on Equity
EBITDA
Less: Capital
Expenditure
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
4,000,000.00
Depreciation
Expense
Note: Corporate taxes are considered in calculating debt repayments (interest paid before tax and princip
earnings. However, the return on equity is after corporate but before personal tax. The aftertax return wo
circumstances of the investor.
Security Valuation (Enterprise Value = multiple of estimated EBITDA, Debt value = book and E
0
1
2
Debt
Equity
Firm Value
Evaluation of IRR on the Platform Company Investment
Year
0
Debt
Equity
Firm
Internal Rates of Return (IRR) on LBO Firm's Equity Investment
Equity (with debt)
Company
Company A
Company B
Company C
Company D
Unlevered Cost of Equity
APV Valuation
PV(OCFs) Planning Period
PV(ITS) Planning Period
PV (TV of firm)
Firm Value
Less: Debt
Equity Value
NPV of the Acquisition
Solut
Growth distribution
Min
Likely
Max
0.00%
10.00%
15.00%
O Model Valuation
Purchase Price
Interest
Loan Balance
Principal Payment
Growth
0.00%
Flows
Year
4
f Equity Capital
uity Beta
Debt to Equity
Marginal Tax Rate
29.77%
30%
43.95%
30%
34.20%
30%
26.15%
30%
Average
Unlevered Beta
1.16
1.34
1.17
1.04
1.18
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
Average
Year 5