Questions about LBO share price
When inserting an LBO valuation into a football field graph; how do you get to the lbo share price range (min and max)?
It doesn't make sense to me to enter the entry equity value divided by # of shares since the capital structure is mostly made out of debt, do enter the exit equity value?
I can't wrap my head around this, also, do I just look at IRR when deciding if an LBO would be profitable, or does the current share price imply and weigh in on anything?
First of all, I've only made enterprise value football fields instead of equity value. Mainly because my bridge would include more than just financial debt. Would have a corresponding share price next to it.
Secondly, you talk post-deal capital structure, while # of shares suggests you are looking at a listed company. You pay EV minus debt to shareholders, so they want to know what they get per share. After the share the owner could decide to cancel all but 1 share, so # of shares then isn't important anymore.
LBO is a model that determines your ability to pay. Inputs are the forecast (I/S, capex, working cap), the capital structure post deal, and potentially exit multiple (often falsely assumed to be equal to entry multilpe).
You solve for 25% IRR, 2.5x MM over 5 year time horizon by changing entry multiple.
Current share price compared to what you can pay based on LBO is what matters ultimately.
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