I struggled on a model test recently and wanted to see if anyone could assist my understanding of some basic valuation concepts. To create a simple question, the model assumed 100 Unlevered FCF growing at 2% for 20 years and the question was to determine the target purchase price of the business based on the following criteria:
Target IRR of 15%
Maximum debt to cap of 60%
Cost of debt of 6%
Financing fees of 2% of the debt issuance amount
I may be overcomplicating the question, but I am struggling to understand how to think about any potential regearing during to the 60% debt to cap over the life of the business as the value of the business grows? Would you do this each year?
Thanks for your help!