I would like to know if someone could provide some information on a couple of questions I have regarding LBOs and valuating them.
I am working on a model which has projections going out 6 years. I am told to assume the terminal value is 10.4 times EBIT on the last year of the projection. What does that actually mean? Do I take the EBIT from the last projected year and multiply it by 10.4, and then what, what does that tell me? I have a figure from the 6 years of cash flows which I have discounted, so I guess I have to compare the two numbers?
Second question is that in the EBIT, do I take out the amount of interest the private equity firm will be paying per year (in my cash flows) to fund this project? There are 5 different loans which will be taken out, and they range from 6 to 10 years, where my projections are only for 6 years, so I do not understand how to spread the longer ones out.
I guess I am just confused, I do not know what the cash flows are telling me. Is the whole point of the leveraged buyout to borrow a lot of money and depend on the cash flows to pay the interest on the debt, and then at a certain point down the road, sell the company for full value once the debt is paid off? Any help, or reference to information would be appreicated.