LBO Technical Question - Whats the answer?
If a P/E firm buys a company 50/50 debt and equity, and the price is $100M and the IRR is 20% what would be the selling price (assume all debt paid is paid off)?
You have to make a few of assumptions to get there (which would be my guess is what's part of the interview process).
I'm assuming cash flows during the year cover debt service but no cash distributions.
I invested $50M so I need $10M in profit to get a 20% return. So the selling price would be $110M. Year 2 it would need to be $122M, Year 3 would be 136.4M etc.
You need to assume a holding period.
Assume cash flows cover debt payback, no dividends, bullet payment...
Assuming a 5-year holding period your MoM would be 2.5x... you invested 50mm so your selling price would be 2.5 x 50 = 125mm
4-year 20% = 2.0x MoM
3-year 20% = 1.75ish MoM
2-year 20% = 1.4ish MoM
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