Investment Banking Lecture 8

Investment Banking Lecture 8 - FPN1: INVESTMENTBANKING...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
FPN 1: INVESTMENT BANKING Lecture 8 – May 18 th 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter 5 LBO Analysis 2
Background image of page 2
Basic Idea An LBO is an acquisition of a business, company, or division using DEBT to finance a large portion of the purchase price Investments are in both private and public companies In an LBO o equity contribution is roughly 30 – 40 % o Debt makes for 60 – 70 % Goal is to make high returns at exit (usually 5 years) 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Basic Idea Leveraging means adding Debt Use of leverage gives higher returns on investment Debt is put on TARGET Target’s cash flows service and repay debt Use of debt provides benefits such as tax savings o Interest expense is tax deductible 4
Background image of page 4
Leveraged Buyouts What You Need To Know For Interviews 5
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Walk me through a basic LBO Model Step 1 : Make assumptions about the purchase price, debt/ equity ratio, interest rate on debt and other variables; you might also make assume something about the company’s operations, such as revenue growth or margins (depending on how much information you have) Step 2: Create a Sources & Uses section, which shows how you finance the transaction and what you use the capital for; this also tells you how much Investor Equity is required Step 3: Adjust the company’s balance sheet for the new Debt and Equity figures, and also add in Goodwill & Other Intangibles on the Assets side to make everything balance 6
Background image of page 6
Walk me through a basic LBO Model Step 4: Project out the company’s Income Statement, Balance Sheet, and Cash Flow Statement, and determine how much debt is paid off each year, based on the available Cash Flow and the required Interest Payments Step 5: Make assumptions about the exit after several years, usually assuming an EBITDA Exit Multiple, and calculate the return based on how much equity is returned to the firm 7
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Why would you use leverage when buying a company? To
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 09/13/2011 for the course MGT 181 taught by Professor Jordan during the Spring '08 term at UCSD.

Page1 / 24

Investment Banking Lecture 8 - FPN1: INVESTMENTBANKING...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online