Corp Dev LBO returns question: Levered and Unlevered IRR

Question

Working on my first LBO case study for a Corp Dev/M&A role. Firm has sent me a CIM and asked me to prepare 10yr Base Case projections to stress test: 1) Purchase Price, 2) EBITDA CAGR, 3) Exit Multiple, 4) Leverage.

In showing the above sensitivity tables, they are looking for the resulting Levered IRR and Unlevered IRR as the ultimate factor to evaluate.

Below is my first attempt to showcase Lev/Unlev FCF (and calculated IRR). Wanted to make sure I wasn't missing anything as my sensitivity tables are looking weird and it's being driven by my Lev/Unlev FCF calculations.

Rover-S · Accepted Answer

A few observations:
1. How can you be tired at 1:13PM? All-nighter?
2. Check the way you included dividends in your calculations. In 2023 you leave c. 3m of cash in the company (cummulative cash flow minus dividend) which you never pay out? 
3. Adjusted tax is somwhat of a DCF concept -> in LBO we use actual tax expense as the interest shield is not included in the WACC calculation.
4. Your interst rate looks very low if I try to reconstruct cashflow from operations from the number I can see here
5.

KeepYourAssetsLiquid · Answer

1) At exit (yr 10), there is no outstanding debt and company doesn't maintain any cash balance. Technically they have a Revolver that provides ~$5MM liquidity included in the model but business is seasonal and YE is when company tends to have lowest debt levels. Based on operating assumptions, they generate enough cash to have full repaid debt/Relov by yr 10. I've assumed that the revolver is held as available liquidity. 
2) I've used WC assumptions/capex/debt service as main driving uses of cash.

KeepYourAssetsLiquid · Answer

Too many nights at +4am in a row.
I used excess LFCF towards discretionary debt prepayments. Once debt is fully serviced, I started paying dividends equal to LFCF after discretionary debt prepayments and minimum cash balance.
Good to know. I found conflicting guidance on this one. Can you explain your rationale a bit for clarity?
Yeah I started with a basic L+300 (case study outlined 3x leverage, all senior). 1mo LIBOR at 1% to start with a 25bps annual step-up. Based on the last few weeks, I know pricing would look very different.

KeepYourAssetsLiquid · Answer

To clarify, when I calc'd Discretionary Debt Prepayments, I used LFC then assumed a 100% debt sweep, first to the Revol, then Senior TL, [then Junior Debt, is assumptions are tweaked to include Jr Debt], with the rest going to Dividends.

+57	Does anyone believe their firm has a true competitive edge	27	4h
+47	Independent Sponsor - Path Ahead?	17	6h
+40	Lateraling at senior associate / VP level	11	1h
+36	2026 PE Associate Bonus Thread	42	19h
+32	Mid Level Attrition	13	10h
+19	Do you regret doing PE?	7	10h
+14	Setting the right LBO entry multiple without information	3	19h
+11	those of you who had an easy banking experience - how f’d were you when you went to PE?	7	5d
+9	PE Junior Summer? As an undergraduate at a target school?	1	5d
+8	Why is every PE firm so top heavy?	3	4d

1	redever	99.2
2	kanon	99.0
3	BankonBanking	99.0
4	Secyh62	99.0
5	CompBanker	98.9
6	dosk17	98.9
7	Betsy Massar	98.9
8	GameTheory	98.9
9	DrApeman	98.9
10	Linda Abraham	98.8

Elite Career Bootcamp. Top Job Offer Guaranteed.

Elite Career Bootcamp. Top Job Offer Guaranteed.

Corp Dev LBO returns question: Levered and Unlevered IRR

Elite Career Bootcamp. Top Job Offer Guaranteed.

Elite Career Bootcamp. Top Job Offer Guaranteed.

Corp Dev LBO returns question: Levered and Unlevered IRR

Trending Content - Private Equity Forum