An LBO interview question
How to best answer this question in an interview? Thanks!
Company has 100 EBITDA in year 0, and is expected to grow EBITDA to 120 in year 5 and decreases debt by 25 each year. Assume the entry multiple is 5x EV/EBITDA and exit multiple is 5.5x. How much additional equity value is created? How much does EBITDA growth, multiple expansion and de-leverage contribute respectively?
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Break it down into three steps:
$125m + $60m +$100m = $285m in equity value created
Entry EV = $100 x 5x = $500m
Exit EV = $120 x 5.5x = $660m
$660m - $500m = $160m + $125m in debt reduction = $285m in equity value created
Thanks for your detailed reply :)
What confused me in the first place is the equity value created by multiple expansion. Why is it not $100* .5x? （the underlying assumption here is how much value created if only the multiple expands and no changes in EBITDA and debt). Thanks!
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