Case

Reykjavik Fleet Leasing

Problem

You have been asked to estimate the rate of return to investors in a leveraged buyout.
The key calculation is the exit valuation. You will base the exit valuation on the concept "Equity=Enterprise Value
You will assume exit enterprise value is performed at a multiple of EBITDA which equals the entry valuation.
The facts are as follows:

Company

Company purchase price:

Initial debt of company:
Initial cash of company:
Initial EBITDA of company:
Growth rate of EBITDA:

500 million ISK

100
50
75
7%

Financing

Debt:
Annual amortization:
Management equity investment:
Sponsor equity investment (convertible preferred)
Management bonus:

300
50
30
170
3%

After
At
With cash

5 years
7.3 times exit EBITDA
50

Exit

15%
85%

(with

5%

oncept "Equity=Enterprise Value - Net Debt"

h equals the entry valuation.

dividend)

Reykjavik Fleet Leasing

LBO Exit IRR calculation
Initial equity cost
Initial company debt
Initial EBITDA

200
400
75

Sponsor equity 5% conv preferred

Sponsor dividends
Management equity
Management bonus equity

85%
5%
15%
3%

Exit Analysis
Exit after
Debt paid down
EBITDA has grown at a rate of
Exit EBITDA
Entry EV/EBITDA

5 years
250
7%
105
7.3

Rate of Return Analysis

IRR to sponsors
IRR to management

30%
32%

Exit enterprise value

Exit debt
Exit cash
Exit equity value

0
-170
-30

1
8.5
0

2
8.5
0

3
8.5
0

771
150
50
671

4
8.5
0

5
559
121