Modeling Question: Acquisition of Infrastructure Business
I received an interview question that asked about the purchase price of an infrastructure business assuming a target IRR of 15%, max debt to cap of 70%, useful life of 30 years and operating inputs were provided to get to CFADS. The modeling test prompted a debt structure with a 5% cost of debt. The questions were: (1) what is the purchase price; (2) what is the IRR assuming a year 10 exit; (3) what is the IRR assuming a year 5 exit.
What is the "appropriate" and "simple" way to model the debt structure? I assumed a simple 7 year LBO (1% amort and say 50% excess cash sweeps in each year), but got tripped up on the refinancing. Is it defensible to assume that same structure (1% and 50% sweep) in perpetuity until all debt is repaid? Should a stressed refinancing rate be assumed? Should the business be relevered to the initial leverage cap at the end of every 7th year?
Thanks and I appreciate the help!