Question

137)

Normally in a leveraged buyout analysis, you use the existing 3-statement projections you have for a company. However, in some cases you will have to revisit your assumptions and build a new model, especially when the company is changing its core business model. If a retailer, restaurant, or hotel is switching from an owned & operated business model to a franchised business model, what would change in your LBO model and deal analysis?

a) Potentially, franchised revenue could be much higher-margin and carry lower fixed costs than revenue from owned & operated locations.

b) Franchised revenue is effectively “free” since there are no associated costs or corporate overhead, so COGS and Operating Expenses would be 0 for that segment.

c) The franchise business model does present some additional risk because the brand name and quality of the experience may not be maintained, which could hurt sales.

d) The franchise model may make the company less attractive to private equity firms since it will result in a lower fixed asset base.

141)

Which of the following items DIRECTLY factor into the calculation of a private equity firm’s internal rate of return (IRR) in a leveraged buyout?

a) Net Income.

b) Dividends.

c) Cash flow available for new debt repayment.

d) Initial investor equity contribution from the PE firm.

e) Optional debt principal repayments.

f) Net interest expense.

g) Net sale proceeds upon exit.

h) Capital expenditures.

i) Mandatory debt principal repayments.

Answer 1

1.Leverage Buyout Helps in Computing the Maximum value that a Financial Buyer Could Pay for the target Company and amount of Debt that needs to be Raised along with financial Considerations like the present and Future Cash Flows of the Target Company.

So,Option(d)-The Franchisee Model May Make the Company Less Attractive to Private Equity Firms Since it will Result in a Lower Fixed Asset Base.

2.Option(i) and (g)-Mandatory Debt Payment Principal Payment is Directly Affect Internal rate of return in leverage buy out and Net Sale Proceeds Upon Exit.