Dilution

Question 1

Convertible bonds

Answer 1

convertible bonds = dollars / par value

1. Conversion price < share Patrice convert to bonds

Conversion rate = par value / conversion price
Conversion price = par value / conversion rate

Question 2

Pro Forma Net Income

Answer 2

NI A + NI B + synergies - foregonr interest income on cash - new interest expense on debt

Question 3

what is a leveraged buyout, and why does it work

Answer 3

In a LBO, a private equity firm acquires a company using a combination Debt and Equity, operate it for several years, and then sells the company at the end of the period to realize a return on its investment

Question 4

Walk me through a basic LBO

Answer 4

1. Make assumptions for the purchase price, debt and equity, interest rate and debt, and other variables such as the company’s revenue growth and margins.
2. Create a sources & uses schedule and purchase price allocation schedule
3. Adjust company’s balance sheet for the new debt and equity figures, allocate the purchase price, and add goodwill & other intangibles to the assets side to make everything balance
4. Project company’s income statement, balance sheet, and cash flow statement, and determine how much debt it repays each year based on Free Cash Flow
5. Make assumptions about the exit, usually assuming an EBITDA exit multiples, and calculate the IRR and money-on-money multiple based on the proceeds the PE firm earns at the end of

Question 5

What assumptions impact a LBO the most

Answer 5

1.purchase and exit assumption make the biggest impact
2. Lower purchase multiple and higher exit multiple results in higher returns
3. Debt%. If the deal performs well, more leverage will make it perform even better.
4. Revenue growth, EBTIDA margin, interest rate and principal repayment

Question 6

Ideal target for LBO

Answer 6

1. Have stable and predictable cash flows ( so it can repay debt)
2. Not have much need for ongoing investments such as CapEx
3. Be in a fast-growing and highly fragmented industry (so the company can make add-on acquisitions)
4. Have opportunities to cut costs and increase margins
5. Have a strong management team

Question 7

PE firm boost its return in an LBO?

Answer 7

• multiple expansion (reduce purchase multiple or increase exit multiple)
• EBITDA growth ( increase the company’s revenue growth rate or boost its margins by cutting expenses
• increase leverage used in the deal, or improve the company’s cash flow by cutting CapEx and working capital