Calculating Returns to Equity Holders – Accounting & Finance Assignment Help


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Consider the Excel spreadsheet model: “ALT_INV_SEM1_2022_PROBLEM6.xlsx”. This spreadsheet corrects the limitations of the spreadsheet. 

A simple LBO model 
1. All cashflows are in $Millions and occur at the end of the year 
2. Cost of the target is 50M and the target is ungeared 3.

Funded by: 
i. Senior Debt (70%) 
ii. Mazzanine Debt (20%) 
iii. Equity (10%) 
Interest rate on senior debt is 12% p.a reducing 
Mezannine debt is 15% 
pa interest only plus 15% 
ownership share of business at the end of 4 years 
Corporate Tax Rate = 36% 
Cashflow forecasts 
EBIT = 11.5M in Year 1, growing at 2% pa 
Depreciation = 2M pa 
Investment expenditure = 2M pa 
Business (geared) sold at the end of Year 4 at an exit PE multiple of 7 times Year 4 Profit-After-Tax

(i) Alter the EBIT values in the spreadsheet and produce a table that gives the IRR to equity holders (with no fees), the IRR to equity-holders (with fees), the DPI ratio (assuming no fees) and the DPI ratio (with fees). 
(ii) Using at least 3 fixed EBIT values, vary the proportions of the LBO that are funded by senior debt, mezzanine debt and equity and produce a table that gives the IRR to equity holders (with no fees), the IRR to equity-holders (with fees), the DPI ratio (assuming no fees) and the DPI ratio (with fees). NOTE: You will have at least 3 tables for this part, one for each EBIT value that you choose. 
(iii) Comment critically on your results. 
(iv) Comment critically on the limitations of this spreadsheet model, including a comment on the limitations of the IRR method for calculating returns to equity-holders.

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