Investment Banking Lecture 8

Investment Banking Lecture 8 - FPN1 INVESTMENTBANKING...

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FPN 1: INVESTMENT BANKING Lecture 8 – May 18 th 1
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Chapter 5 LBO Analysis 2
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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
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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
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Leveraged Buyouts What You Need To Know For Interviews 5
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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
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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
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Why would you use leverage when buying a company?
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