Giddy | Case Study

Case Study
Reykjavik Fleet Leasing

Prof. Ian Giddy, New York University

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 - Net Debt"

You will assume exit enterprise value is performed at a multiple of EBITDA which equals the entry valuation.

The facts are as follows:

The Target Company
Company purchase price:	600	million ISK
Initial debt of company:	100
Initial EBITDA of company:	75
Growth rate of EBITDA:	7%

The Proposed Financing
Debt:	400
Annual amortization:	50
Management equity investment:	30		15%
Sponsor equity investment (convertible preferred with 5% dividend)	170		85%
Management bonus:	3%

The Exit
Exit after	5		years
At exit multiple of	7.3
With cash of	50

Questions:

1. What is the exit equity value?
2. What internal rate of return can sponsors expect? And management?