INPUT SHEET: MERGER & LBO V

STEP 1: Estimate the total cost of the deal

Price per share= 201
# shares outstanding (mil)= 21.9
Total cost of the deal= 6201.9

STEP 2: Define how the deal will be financed

Source Amount Int. rate

Equity 1000 NA
Pfd. STOCK 0 0.00%
Debt: Type 1 1700 16.00%
Debt: Type 2 3500 18.00%
Debt: Type 3 0 0.00%
Debt: Type 4 0 0.00%
Interest rate on debt remaining in terminal year=
Suggestion: For the first run, enter an arbitrary schedule; Check cashflows to equity; If -'ve modify schedule;

STEP 3: Define rates of future growth

1
Revenues 14.00%
Depreciation (See below) 14.00%
Cap. Spending (See below) 14.00%
Working Cap : % of Revenue 16.00%
COGS: % of Revenues 85.68%
Default values= If you do not enter rates, the growth rates in depreciation, capital spending = growth rate in revenues.
The default values for COGS and Working Capital come from Step 6 b

STEP 4: GENERAL INFORMATION

Current T.Bill rate= 8.00%
Ordinary tax rate= 40.00%

STEP 5: SPECIFY ASSETS TO BE SOLD (Enter the year in which assets will be sold and market value and CF to the firm from those
1
Assets sold: Mkt. Value $0
Assets sold: Revenues $0
Assets sold: COGS (%) 0.00%
Assets sold: Depreciation $0
Assets sold: Capital Spending $0
[ Enter the market value of the asset sold; Enter the EBIT, Depreciation and Capital Spending of the asset; Only in the year sold]

STEP 6: ENTER INFORMATION ON CURRENT INCOME STATEMENT

Revenues = $10,000
Current EBIT = $892.00
Current Int. Exp= $200.00
Current Deprec'n= $540.00

PRE- LBO
CURRENT 1
Revenues $10,000 $11,400
COGS $8,568 $9,768
Depreciation $540 $616
EBIT $892 $1,017
-Int: Type 1 $200 $272
-Int: Type 2 $0 $630
-Int: Type 3 $0 $0
-Int: Type 4 $0 $0
Taxable Income $692 $115
- Taxes $277 $46
Net Income $415 $69
+ Deprec'n $540 $616
CF from Oper. $955 $685
- Capital Sp. $438 $499
- WC Chg $196 $224
- Prin. Rep:1 $0 $0
- Prin. Rep:2 $0 $0
- Prin. Rep:3 $0 $0
- Prin. Rep:4 $0 $0
- Pref. Div $0 $0
+ Asset Sales $0 $0
CF to Equity $321 ($39)
+ Pref. Div $0 $0
+ Int (1-t) $120 $541
+ Princ. Rep $0 $0
CF to firm $441 $502
Term Value of Equity=
Term Value of Firm=

CAPITAL STR
PRE-LBO
CURRENT 1
Debt: Type 1 $1,800 $1,700
Debt: Type 2 $0 $3,500
Debt: Type 3 $0 $0
Debt: Type 4 $0 $0
Pfd. Div $0 $0
Equity $4,402 $1,000
D/E 40.89% 520.00%
D/(D+E+Pfd) 29.02% 83.87%
Pfd/(D+E+Pfd) 0.00% 0.00%
Beta 1.05 3.47
Cost of Equity 16.93% 37.53%
Interest rate 12.00% 17.35%
WACC 14.10% 14.78%

Cum Cost of Eq. 1.375

Cum WACC 1.148

RESULTS OF THE
: MERGER & LBO VALUATION

Debt outstanding currently (mil)= 1700

Other costs (Investment banker etc.)= 0

Repayment schedule ( as % of principal)

1 2 3 4 5 6 7 8 9 10

0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
0.00% 0.00% 0.00% 10.00% 10.00% 10.00% 10.00% 20.00% 20.00% 20.00%

12.00%

2 3 4 5 6 7 8 9 10 After yr 10
14.00% 14.00% 14.00% 14.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
14.00% 14.00% 14.00% 14.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
14.00% 14.00% 14.00% 14.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00% 16.00%
85.68% 85.68% 85.68% 85.68% 85.68% 85.68% 85.68% 85.68% 85.68% 85.68%

Capital come from Step 6 below.

Market risk premium= 8.50%

Current beta of firm= 1.05

CF to the firm from those assets)

2 3 4 5 6 7 8 9 10
$0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
$0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0
n the year sold]

COGS as % of Revenue= 85.68% (Default = 1 - (EBIT+Depreciation)/Revenues)

Current Capital Spending= $438.00
Working Cap. as % of Revenues= 16.00%
 Interest rate on Debt Currently= 12.00%
CASHFLOWS FROM LBO
AFTER LBO
2 3 4 5 6 7 8 9 10 Term Year
$12,996 $14,815 $16,890 $19,254 $20,794 $22,458 $24,255 $26,195 $28,291 $30,554
$11,135 $12,694 $14,471 $16,497 $17,817 $19,242 $20,781 $22,444 $24,239 $26,179
$702 $800 $912 $1,040 $1,123 $1,213 $1,310 $1,415 $1,528 $1,650
$1,159 $1,322 $1,507 $1,717 $1,855 $2,003 $2,164 $2,337 $2,524 $2,725
$272 $272 $272 $272 $272 $272 $272 $272 $272 $204
$630 $630 $630 $567 $504 $441 $378 $252 $126 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$257 $420 $605 $878 $1,079 $1,290 $1,514 $1,813 $2,126 $2,521
$103 $168 $242 $351 $432 $516 $605 $725 $850 $1,009
$154 $252 $363 $527 $647 $774 $908 $1,088 $1,275 $1,513
$702 $800 $912 $1,040 $1,123 $1,213 $1,310 $1,415 $1,528 $1,650
$856 $1,052 $1,275 $1,567 $1,770 $1,987 $2,218 $2,502 $2,803 $3,163
$569 $649 $740 $843 $911 $984 $1,062 $1,147 $1,239 $1,338
$255 $291 $332 $378 $246 $266 $287 $310 $335 $362
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $350 $350 $350 $350 $700 $700 $700 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$32 $112 ($147) ($5) $263 $387 $168 $344 $529 $1,462
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$541 $541 $541 $503 $466 $428 $390 $314 $239 $122
$0 $0 $350 $350 $350 $350 $700 $700 $700 $0
$573 $653 $744 $849 $1,079 $1,165 $1,258 $1,359 $1,467 $1,585
$17,828
$19,528

CAPITAL STRUCTURE AND COSTS OF EQUITY/CAPITAL

AFTER-LBO
2 3 4 5 6 7 8 9 10 Term Year
$1,700 $1,700 $1,700 $1,700 $1,700 $1,700 $1,700 $1,700 $1,700 $1,700
$3,500 $3,500 $3,500 $3,150 $2,800 $2,450 $2,100 $1,400 $700 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0 $0 $0 $0 $0
$1,069 $1,223 $1,475 $1,838 $2,365 $3,012 $3,786 $4,694 $5,782 $7,057
486.47% 425.09% 352.54% 263.91% 190.29% 137.78% 100.36% 66.04% 41.51% 24.09%
82.95% 80.96% 77.90% 72.52% 65.55% 57.94% 50.09% 39.77% 29.33% 19.41%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
 3.30 2.99 2.63 2.18 1.81 1.54 1.35 1.18 1.05 0.96
36.08% 33.45% 30.33% 26.51% 23.35% 21.09% 19.48% 18.01% 16.95% 16.20%
17.35% 17.35% 17.35% 17.30% 17.24% 17.18% 17.11% 16.90% 16.58% 12.00%
14.79% 14.80% 14.81% 14.81% 14.83% 14.84% 14.86% 14.88% 14.90% 14.45%

1.872 2.497 3.255 4.118 5.079 6.151 7.349 8.672 10.142

1.318 1.512 1.736 1.994 2.289 2.629 3.020 3.469 3.986

RESULTS OF THE MERGER/LBO ANALYSIS

PV of CF Investment Decision
Equity Investors $1,974 $1,000 ACCEPT THE DEAL
All Investors $9,148 $6,200 ACCEPT THE DEAL

Cashflow to Equity Investors

Average FCFE = $164
Maximum FCFE = $529
Minimum FCFE= ($147)
Std. Deviation of FCFE $214

Leverage
D/E Ratio before LBO = 40.89%
D/E Ratio after LBO = 520.00%
D/E Ratio in year 5= 190.29%
D/E Ratio in year 10 = 24.09%

Beta
Beta before LBO = 1.05
Beta after LBO = 3.47
Beta in year 10 = 0.96