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Private Equity Assignment (Doc)

   

Added on  2020-10-22

9 Pages2195 Words173 Views
PRIVATE EQUITY

Table of ContentsINTRODUCTION...........................................................................................................................1Forecasted Cash Flows for Wilcox Industries for Project Sponsor........................................1Internal Rate of Return...........................................................................................................4Issues in considering IRR as benchmark................................................................................5Adjusted Net Present Value (APV)........................................................................................5CONCLUSION................................................................................................................................6REFERENCES................................................................................................................................7

INTRODUCTIONLeverage Buy Out or LBO is a type of acquisition strategy employed by businesseswherein a substantial amount of money is borrowed so as to finance such a strategic move. Theacquired company as well as its assets are used as collateral to repay the loans taken by theacquiring company (Amess and Wright, 2012). This report aims to analyse the LBO of WilcoxIndustries Pty Ltd to ascertain whether they meet Private Equity Fund's return criteria or not. Forthis purpose, Equity Free Cash Flow forecasts, Internal Rate of Return (IRR) are utilized andinferences have been made thereof.Forecasted Cash Flows for Wilcox Industries for Project SponsorFrom the given information of Wilcox Industries, the following Cash Flow Statement hasbeen forecasted to ascertain Equity Free Cash Flows:Project Details (years/$'m)01234Revenue600615633.45655.62681.85EBIT (% of Revenue)5.00%5.25%5.38%5.45%5.50%EBIT3032.2934.0835.7337.5Less: Net Capital Expenditure2-1-3-5-73031.2931.0830.7330.5Less: Increase in Working Capital-0.75-0.92-1.11-1.31Free Cash Flows To Equity3030.5430.1629.6229.19Present Value of future FCFE @ 15%43026.5722.9219.5516.64NPV4115.68Assumptions: 1.Annual Depreciation Expense = $15m2.Required Return on Equity for an all equity funded firm (p) = 15% p.a.3.Any Surplus Cash Flows available after debt servicing are available as dividends to theproject sponsors4.No Debt Exists.It is important to note that the aforementioned figures in regards to FCF and NPV arebased on Equity. These Free Cash Flows to Equity are Unlevered in nature as they do not includepayment of financial expenses such as interest and taxes. While Unlevering the firm's cash flows,1

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