Hello everyone,
I have come across a paper LBO which is slightly different from the traditional exercises.
How would you approach it?
Thanks!
My capital structure is 50% debt and 50% equity and the IRR is 20%. If the cost of debt increases from 5% to 10%, by how much does the IRR change?
What if the capital structure is instead 25% equity and 75% debt?
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Use simple example and work backwards. Assume 100mm ebitda, 10x multiple. That means 1bn TEV. 500 debt 500 cash. To get 20% IRR over 5 years that means 2.5x MOIC = $1.25bn equity at sale.
if you add 5% interest to the amount you were lying on 500mm, that’s extra $25mm x 5 years = 125mm extra interest, but assume 25% tax rate so only extra $94mm in cash out the door. So 1.25bn - 94mm = 1156 = 2.3x or ~18% IRR.
For other question you would need to ask a follow up since there are a few ways to interpret the change (I.e are you assuming same purchase price and sale price, any other changes).
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