Linking cash flows to exit price
Hey guys,
I am an intern working at a pe and I have a question.
My boss asked me to calculate the how much to sell the company for given the cash flows of the company which will have an irr of 15% in this transaction. lets say company's cash flows start at 2015 and our exit will happen in 2017 and cash flows end in 2023.
I have used npv(0.15, cash flows from 2017 to 2023) is this true?
You haven't provided enough information for anyone to answer you with confidence, but I'll throw out a potential solution.
If the exit value is the unknown variable, then you would simply adjust your exit value until the IRR is 15%.
Cash flows may look like: 12/31/2014: negative purchase price -$500 2015 CF: $100 2016 CF: $100 2017 CF: $100 Exit value at EOY 2017: X (solve for X so that IRR equals 15%)
You can solve for X by using the goal seek function in excel, or you can just change the exit value cell by hand.
Are you actually getting cash flows over those years? In a usual buyout, due to restrictive baskets in your debt covenants, you have to use cash flow to pay down debt and cannot actually pay cash flows to yourself. In that context, what your boss may have meant was "given the cash flows paying down debt over the next several years, how much do we have to sell the company for (on an enterprise value basis) in order to get a 15% IRR", which is akin to calculating the equity value required to sell in the out year and then grossing that up with leverage to the required TEV. (i.e. if you paid down more debt over the life the TEV you sell for could be lower because a higher percentage of that is equity which counts towards the 15% IRR)
If my assumption above is incorrect and somehow your cash flow is more bond like, then spyvspyder's methodology looks sound. But one big CAUTION I will give based on the formula you provided, make sure you include in your stream of cash flows any 0's in leading years so the NPV calc knows that 2017 isn't really the first year. So assuming you invest at 12/31/2014, your string of cash flows should look like "0,0,[2017 cash flow]..."
As spyvspyder said, a little insight about the investment and how you are pulling out cash flows (both now and after a sale) would be helpful for context.
Voluptate sunt eligendi qui culpa porro corrupti accusantium. Ut enim aut accusantium dolor et ipsa. Saepe nulla explicabo eos. Repellat et esse molestias totam qui.
Quia doloribus maiores qui officia. Suscipit et dolorum et maxime veritatis. Nostrum eaque animi libero minima recusandae libero qui ipsa. Culpa atque ipsam et eveniet.
Perspiciatis ab vero minima deserunt. Similique ipsam est et tempore voluptas dolor odio nobis. Quis iure suscipit consectetur rerum illum et distinctio. Nisi officiis minima maxime libero. Ea nulla eius hic et quis. Aut est ipsa eligendi est consectetur occaecati.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...