Case Problem

Reykjavik Fleet Leasing

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: Debt: Annual amortization: Management equity investment: Sponsor equity investment (convertible preferred) Management bonus: After At With cash

500 million ISK 100 50 75 7% 300 50 30 170 3%

Financing

15% 85%

(with

5%

Exit

5 years 7.3 times exit EBITDA 50

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 Sponsor equity 5% conv preferred Sponsor dividends Management equity Management bonus equity Exit Analysis Exit after Debt paid down EBITDA has grown at a rate of Exit EBITDA Entry EV/EBITDA 200 400 75 85% 5% 15% 3%

5 years 250 7% 105 7.3

Exit enterprise value Exit debt Exit cash Exit equity value

Rate of Return Analysis IRR to sponsors IRR to management

30% 32%

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