Tutorial 4 - LBO

Question 1

Can Net Debt be positive?

Answer 1

Yes

Question 2

What is the formula for Net Debt?

Answer 2

Net debt = -Senior debt (end of period) - short-term liabilities (end of period) + cash

Question 3

When is Net Debt positive?

Answer 3

When the company has more cash on hand then longterm and short term liabilities.

Question 4

What does the position refinancing debt refer to?

Answer 4

When you take sum the long-term and short term liabilities of the target company and then pay back that amount with your preferred bank. E.g. PE investors work with DB and then they pay back all the loans the company has. So they can start with no debts when loading on their own.

Question 5

Why is there a cash reserve in the uses of funds?

Answer 5

Because in turbulent times like now the PE investor prefers to load some cash into the company so that there are no liquidity problems.

Question 6

What is the “uses of funds”?

Answer 6

It refers to the total acquisition cost of the target company.
Equity value + Refinancing of debt + transaction cost + cash reserve

Question 7

What is important to consider in calculating the common equity when there is a shareholder loan?

Answer 7

You have to substract the PIK from the common equity because the shareholder loan is not paid out but the interest is taken from the equity component.

Question 8

Should capital expenditures be higher than depreciation?

Answer 8

Yes, otherwise, you lose assets

Question 9

How do you calculate the increase or decrease in cash?

Answer 9

For the first period:
Sum of CF from all three activities + cash on hand (cash reserve) from the transaction structure
For all the other periods:
Sum of CF from all three activities

–> the cash on hand is a one-time event!

Question 10

MM

Answer 10

Money Multiple