You are considering buying a company using leveraged buyout. The company is proj

Question

You are considering buying a company using leveraged buyout. The company is projected to have sales of 500 million each year in the three years after buyout. The cost of sales and other administrative expenses are 60% of the sale. Depreciation and amortization are 5% of the sale. Tax rate is 40%. Suppose that the change in net working capital and capital expenditure each year is zero. If you borrow 1.5 billion at interest rate of 8% per year, and you use all the cash flow to repay debt.

1. How much debt can you retire in the first year? (Enter the number in millions.)

2. How much debt can you retire in the second year? (Enter the number in millions.)

3. What is the debt level two years after buyout?(Enter the number in millions.)

Explanation / Answer

Year 1 Year 2 Sales 500000000 500000000 Expenses = Sales * 60% Cost of sales and administrative cost 300000000 300000000 Depreciation = 5%* Sales Minus Depreciation 25000000 25000000 Total Debt* interest rate Minus Interest expense 120000000 117360000 (Debt Outstanding * Interest Rate) EBT 55000000 57640000 Taxes = EBT * Tax rate 22000000 23056000 EAT = EBT -Taxes 33000000 34584000 a) Amount of Debt to be retired 33000000 (33 millions) Debt Outstanding 1467000000 b) Amount of Debt to be retired 34584000 (34.584 millions) c) Debt outstanding after 2 Years Debt Outstanding 1432416000 (1432.416 million)

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