LBO Flashcards
What is a leverage buyout primarily used for
It is to determine what a private equity firm can afford to pay, the buy is primarily funded with debt
What is equity value
Value of the sharehoders interest, or market valye, offer value or market cap
What is the difference between book value and market value
Book value of net assets that is assets less liabilities that belong to a company shareholders as stated on the balance sheet. Represents the historical cost of shareholders equity
What is the m&a process
Development of an m&a strategy – the due diligence part is the longest
Identify and evaluated target company
Neogtation and intent signed
Transaction – refine the initial valuation and projections. Due diligence, negotitate,c lose and nda signed
Post merger integration.
What is a lbo
This is a leverage buyout analysis
What things are looked for in an lbo
Stable cash flow firm, undervalued, predictable investment needs, viable exit strategy
Run me thorugh the process
INCOMPLETE Determine how much it is worth today look at leverage ratio
Senior debt or total debt divided by ebidta
Coverage is ebitda (-capex).interest expense
Process
Run me thorugh the process simple
We determine how much the firm is worth based on the amount of debt that we can borrow, we can determine the maimnum purchase price. Upon selling it we can realise the IRR.
Wht is IRR formula
= -FV/PV)1/n – 1
Walk me through it simple
It is similar to a dcc, except here we are solving the discount rate or internal rate of return.
the ire is when it equates the projected cash flow and terminal value with the initial equity investment
1. find maximum borrowing capacity of the firm
2. determine purchas price necessary to buy out target firms shareholder and estimating the initial equity contribution made y financial sponsor
3. calculate ire, it must be greater than pe firms ire
in order of increasing riskiness bonds
senior bank loan, junior, high yield, mezzanine
step one in lob maximum borrowing
senior debt or total debt/ ebitda is leverage ratio.
ebidta (-capex)/interest exp is coverage ratio
total debt capacity is ebidta multiply by leverage multiple found
step two max purchase price
total debt capacity/ (1-%equity contribuition)
step three irr
irr = ((-fv/pv)1/n)-1
how much of the cash-flow goes to debt
about 50 percent, the rest is needed to reinvest and incentivise management
