FNCE6037 Assessment Brief
Assessment Tittle : Financial Modelling & Investment
LBO Valuation Scenario
Contained herein is a typical financial modelling and investment assessment (as part of the interview) for aspiring investment bankers or analysts who intend to join the finance industry. A time-constraint is normally being applied, i.e. 60-120 minutes, to complete the assessment. No prior templates or files will be provided or allowed to be downloaded, and you are required to build the model from scratch.
However, as this is an assignment, you are encouraged to use any materials provided in the weekly session and/or any resources available to you. Please ensure the model and respective calculations are constructed in a logical manner. Presentation and formatting is not critical but you are encouraged to make your model readable and presentable – it is a good modelling habit to have. You are not required to build a balance sheet for the exercise but other proformas will be required to derive the results for analysis.
Once you have finished constructing the model, please respond to the investment assessment questions at the bottom based on the results generated by your model.
Case Materials and Assumptions
A private equity firm plans to acquire a private, family-owned gadget manufacturing company (“Target”) with annual sales of $550 million and EBITDA margins of 18% for 15x LTM EBITDA. The transaction will be structured as a cash-free, debt-free deal, with a possible cash injection on Day 1.
Total advisory and financing fees will equal 2% of the Purchase Enterprise Value. For simplicity, assume no amortization of the financing fees.
The PE firm plans to fund the deal with the following –
| Term Loans |
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| Senior Notes |
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| Subordinated Notes |
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Management will also receive a 5% options pool, with an exercise price equal to the PE firm’s per-share offer price to acquire this company.
Target’s profile and cashflow forecasts assumptions are described below
| Annual Sales |
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| No. of Factories and Capital Expenditure |
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| Other Expenses |
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| Depreciation |
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| Minimum cash |
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| Working Capital |
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| Tax Rate |
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Case Study Questions
- What are the IRR and multiple of invested capital (MOIC) at reasonable exit multiples in Years 4 and 5? Please generate a sensitivity and scenario table like the ones used in the weekly lesson. Based on these results, would you recommend investing in this transaction and what are the rationale (considering a typical PE IRR target ranging from 12-20%)?
- Is the Target’s financial projections plausible? Why or why not?
- What is the best way for the PE firm to increase returns in this transaction without changing the Target’s financial projections?
- Are there any other financing option that the PE fund should consider?
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