IRR, Free Cash Flow to Equity DCF & working capital loans

tellmehowtoplay's picture
Rank: Baboon | 111

Hi all,

Just some queries on IRR/DCF, especially on Free cash flows to Equity (FCFE).

So basically, the business case is:

  • minority investor, paying 30m for 50% stake in a company with 0 debt (valuation of 60m).
  • Upon investing, company will also take on a "working capital" loan of 30m (which the minority investor might provide, if not they will get another provider)
  • WC loan will be paid down 3m every year, assume 300k interest per year)
  • EBITDA of 10m, assume 10m FCF, 5x terminal value of ebitda at year 10, and dividend of 6m allowed to be upstreamed per year

For IRR of the Cashflows of the firm, do we take upfront investment of 60m and calculate the IRR based on the FCF of 10m and terminal value and account for the loan separately? or should we account for the debt as well?

For IRR of the levered cash flows, do we take upfront investment of 60m and calculate the IRR based on the dividends of 6m, and then account for terminal value of EBITDA, along with the trapped cash in the firm at the end of the 10 year period? (1m accumulates each year, 7m FCFE (10m of FCF - 3m of debt repayment))?

I'm not sure if i'm even looking at it correctly from an IRR perspective.

Thanks everyone for the help!

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Mar 26, 2020
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