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FCF - Term Loan A vs Term Loan B

(Chimp, 6

Points) on 10/11/08 at 4:52pm

I was recently in an interview and asked to calculate the PF free cash flow in the following scenario. The acquisition given was a company that had $40mm of EBIT, $10mm of D&A, $10mm of Capex, Change in Working Capital was assumed to be $0 and the tax rate was 40.0%. The debt to finance the transaction would be 100% bank debt given the size and would be split between Term Loan A and Term Loan B.
Assuming the transaction multiple of 5.0x EBITDA (assuming no cash or debt transaction) with a 40.0% equity check, the company would have $150mm of debt--$75mm Term Loan A and $75mm Term Loan B. Assume that Term Loan A has an 8.0% cost of debt and amortizes over 10 years while Term Loan B has a 10.0% cost of debt. Assuming 2.5% financing fees amortized over ten years, I calculated FCF below. Please let me know of any comments.

Pro Forma Free Cash Flow
EBIT - $40.0mm
(+) D&A - $10.0mm
(+) Term Loan A Amortization - $7.5mm
(+) Amortization from Financing Fees - $0.4mm
EBITDA - $57.9mm
(-) Capex - $10.0mm
(-) Change in WC - $0.0mm
(-) Interest Expense from Term Loan A - $6.0mm
(-) Interest Expense from Term Loan B - $7.5mm
(-) 40.0% Tax (Tax based on EBIT - Interest Expense from Term Loan A and B) - $10.6mm
FCF - 23.8

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You got the idea but its much easier to start with net income

by welldawg08

(Senior Chimp, 26

Points) on 10/12/08 at 10:03pm

I caught one thing: the financing fee would be $6.25mm (2.5% x $250mm purchase price), or $0.625mm per year amortizataion. (PP calc = $50mm EBITDA * 5x multiple = $250mm)

Cash Flow From Operations (Operating Cash)
- Capital Expenditures
---------------------------
= Free Cash Flow

broken down more is

Net Income
+ D& A
+/- Change in WC
- Capital Expenditures
---------------------------
= Free Cash Flow

EBIT - $40.0mm
- Interest Expense from Term Loan A - $6.0mm
- Interest Expense from Term Loan B - $7.5mm
EBT - $26.5mm
- Taxes $10.6
Net Income $15.9
+ D&A - $10.0mm
+ Amortization from Financing Fees - $0.625mm
- Amortization of Term Loan A - $7.5mm
- Capex - $10.0mm
- Change in WC - $0.0mm
-----------------------------
FCF = $7.775mm

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How can EBITDA rise

by gunboatdiplomat

(Monkey, 46

Points) on 10/12/08 at 12:17pm

by $7.9m given that (we assume) the operations of the company, and thus revenue and operating expenses, remain the same?

I think you're confusing http://en.wikipedia.org/wiki/Amortization_(business)

with

http://en.wikipedia.org/wiki/Amortization_(business)#Accounting

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why are you guys adding back

by ke18sb

(Senior Orangutan, 388

Points) on 10/12/08 at 12:02pm

why are you guys adding back the Term A Loan Amortization - it doesn't hit the IS - it should be deducted

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Hmmm

by curiousmonkey

(Senior Baboon, 222

Points) on 10/12/08 at 12:11pm

Actually, you don't add the TLA amortization to EBIT to get EBITDA. Amortization in the non-cash sense is quite different form Debt amortization, which is mandatory and must be paid in cash.

EBITDA: 50 mm
-D&A: 10 mm
-Financing Fees Amort: .375 mm
EBIT: 39.625 mm
-IntExp A: 6 mm
-IntExp B: 7.5 mm
EBT: 26.125 mm
-Taxes: 10.45 mm
Net Income: 15.675 mm

FCF Calc

Net Income: 15.675 mm
+D&A: 10 mm
+FinFeeAmort: 0.375 mm
+NWC: 0 mm
-Capex: 10 mm
-TLA Amort: 7.5 mm
-TLB Amort: 0 mm
=
8.55 = FCF