46. If a Private Equity firm contributes $225 million of equity to an LBO transa

Question

46. If a Private Equity firm contributes $225 million of equity to an LBO transaction upfront and exits the investment at the end of Ycar 5 for $820 million, what is the cash return earned by the Private Equity firm? (2 points) a. 2.5x b. 3.5x c. 3.6x d. 4.0x 47. If a Private Equity firm contributes $400 million of equity to an LBO transaction upfront and exits the investment at the end of Year 5 for $1,000 million, what is the Internal Rate of Return earned by the Private Equity firm? (2 points) a. b. c. d. 19.5% 20.1% 25.7% 26.7% 48. Why are projections of Capital Expenditures important to evaluate an LBO analysis? (2 points) a. b. c. d. Helps potential buyers evaluate their investment time horizon Capex represents a use of cash and decreases Free Cash Flow Buyers prefer companies with large amounts of maintenance capex Buyers prefer companies with large amounts of growth capex 49. Why is a forward LIBOR curve needed to craft the debt schedule for an LBO analysis? (2 points) a. Deferred financing fees are dependent on LIBOR b. Cash flow from investing activities is dependent on LIBOR c. Serves as a basis for calculating interest expense for Term Loans d. Serves as a basis for calculating interest expense for Senior Notes 50. In an LBO ysis, which of the folowing adjustments is/are typically made to the opening w balance sheet? CIRCLE ALL THAT APPLY. 2 points) a. Subtraction of new LBO debt b. Subtraction of existing shareholders' equity c. Addition of deferred financing fees d. Addition of goodwill created BFIN 7225- Final Exam - Fall 2017 20171030.docx Page 10 of 10

Explanation / Answer

46.

Cash return earned by private equity = Exit Amount / Upfront investment

                                                           = $820 / $225

                                                          = 3.64 times.

Cash return for private equity firm is 3.64 times.

Option (C) is correct answer.

47.

Internal rate of return = [($1,000 / $400) ^ (1/ 5)] – 1

                                   = (2.50 ^ 0.2) – 1

                                   = 1.2011 – 1

                                   = 20.11%

Internal rate of return earned by private equity firm is 20.11%.

48.

In free cash flow calculation, capital expenditure is subtracted from NOPAT to determine free cash flow. If capital expenditure of company is high then free cash flow to the company woul be low. So, projection of capital expenditures important to evaluate an LBO analysis.

Option (B) is correct answer.

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