1. Assuming an exit on 12/31/2025 at 5.0x LTM EBITDA, what is the equity value at exit? For the...

Question

1. Assuming an exit on 12/31/2025 at 5.0x LTM EBITDA, what is the equity value at exit? For the purpose of answering the question, assume any wa
ants proceeds add to the company's balance sheet cash.
2. Which exit date/exit LTM EBITDA multiple combination will provide the highest IRR to prefe
ed stock investors? Use XIRR to get exact IRR assuming a 1/1/2020 investment date.
3. Now change your model to assume an exit on 12/31/2023 at 5.0x LTM EBITDA. Calculate the IRR for the subordinated note holders and assume the subordinated note holders receive both the 12/31/2023 interest payment and return of debt principal at exit.
4. Assuming an exit at 12/331/2023 at 5.0x LTM EBITDA, and assuming a 25% hurdle rate for sponsor equity, what is the maximum equity capital that the financial sponsor can contribute to this deal (assuming all other capital providers maintain their initial investment)?
5. Now change your model such that instead of an exit, the company undergoes dividend recapitalization by issuing an unsecured bond on 12/31/2024 that will
ing the company's leverage ratio (gross debt/EBITDA) at the time of the recap to 3.5x. Assume the prefe
ed shareholders get to participate in the dividend based on their ownership on an as-converted basis while wa
ants and restricted shares do not receive the dividend. What is the dollar value of dividend received by financial sponsors?

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Question
Instructions
On January 1, 2020, the management of manufacturing firm Driscoll Plastics, along with Bluestone Partners, a private equity firm, buys out the existing Driscoll shareholders.  See the Excel table for the sources of funds in the deal.
Preferred stock
The $100 million in preferred stock pays no dividend, is convertible 1 to 1 into shares of common stock at the discretion of the convertible holder with a participating 1.0x liquidation preference.  A participating 1.0x liquidation preference means that in the case of an exit, the preferred shareholder gets their initial capital back along with their full share of proceeds in line with their as-converted equity stake. 
Subordinated debt
As part of the financing, subordinated lenders will receive warrants amounting to 3% of the fully diluted share count at exit. The warrants have an exercise price of $2.00 per share. Assume no warrants are exercised until an exit and that any unvested warrants automatically vest upon the change in control. Assume option proceeds add to the company’s cash balance. The subordinated notes pay an 8% annual cash coupon at year end.
Management share based compensation
In addition to the initial equity investment provided by management, management will also receive restricted stock amounting to 5% of the fully diluted share count. Assume these restricted shares will all vest upon a change of control.
Projections
Attached is a forecast for the company's EBITDA, debt and cash forecasts through 2025. 
There will be no dividends or share repurchases during the period.
HW 5
		Sources of funds on January 1, 2020
		Sponsor equity  (common)	1,094,593,940
		Management equity (common)	882,700,000
		Preferred stock1	100,000,000
		Revolver	449,000,000
		Term Loan B	6,490,000,000
		Term Loan C	3,990,000,000
		Senior Note	767,000,000
		Subordinated Note (8% annual coupon)	2,746,700,000
		Total sources of funds	16,519,993,

1. Assuming an exit on 12/31/2025 at 5.0x LTM EBITDA, what is the equity value at exit? For the purpose of answering the question, assume any warrants proceeds add to the company's balance sheet cash....

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