FIN4611027 - IRR: discount rate that makes investment 0 NPV...

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FIN461 10/27/11 60-70% debt 30-40% equity 20%+annualized target returns tax savings due to tax deductibility of interest payments Stapled finance: shopping target to PE with financing pre-arranged MBO’s give management at stake LBO features: good mgmt, steady CF’s, leading or defensible market positioning, growth opps, low cap ex, untapped assets 5-7 year target investment timeline constant need for innovation hurts CF’s and ability to service debt LBO economics: CF used to service and repay debt Improve performance of target Return analysis: - IRR o Purchase price o Proj financial price o Exit price - Cash Return
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Unformatted text preview: IRR: discount rate that makes investment 0 NPV investment Ex: (250)+750/((1+IRR)^5)=0 Cash return: cash out/cash in ---No time value consideration Ex: 750/250= 3.0x Generate returns from debt repayment and growth in EV Debt repayment: repay debt, profit is created equity stake EV: Purchase $1,000 Equity $250 Debt repay $0 Sale (t=5) $1500 Equity contribution Increase to equity value:-increase in EV= 500-decrease in debt=0 EV @ Sale: 750 (250 initial + 500 in added value) Leverage enhances returns Cash return not a metric that needs to be included Debt drives returns...
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FIN4611027 - IRR: discount rate that makes investment 0 NPV...

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