Answer these five questions. No multiple choice. Write in your answer. ------------------------------------------ Set of assumptions and information projected for an LBO below: Year 1 - 3 Risk-free rate = 6% Market Risk Premium = 7% Enterprise Beta = 1 Debt Beta = 0 Total Debt in Year 0 = $90 Total Debt in Year 1 = $85.3 Total Debt in Year 2 = $79.6 Total Debt in Year 3 = $73 Equity Value in Year 3 = $91 Answer the following questions: 1) What’s the equity value in year 2? 2) What’s the equity value in year 1? 3) What’s the total enterprise value in year 1? 4) What’s the total enterprise value in year 0? 5) What’s the cost of equity in year 1?
- 76.72 2. 63.79 3. 85.3+63.79=149.09 4. 90+52.13=142.13 5. 22.36%
CPK - 100% PS: Dude, I’m going to ban you from answering my questions! haha!
WOW…I’m lost. 1) (73+91)/91 = 1.8 equity beta. 6+(1.8*7)=18.6%. (91/1.186)=76.73 2) (79.6+76.73)/76.73 =2.03 equity beta. Compute new cost of equity as discount = 63.80 3) 63.8+85.3 = 149.1 4) (85.3+63.8)/63.8 = 2.34 equity beta. Compute new cost of equity as discount = 52.14 equity value. Add debt (52.14+90)=142.14 5)22.38% (as computed in question 4). Wow…I had to look back in the notes to get the equity beta formula, but after that it was pretty straightforward. Without that formula though, I was staring blankly at this…CLUELESS.
I couldn’t sleep last night over this! I was close to tears I had no clue when I first saw this question. I have to do this again to be sure I am now able to hold this concept down. Many thanks Damil, regards CP.
Oal29 Wrote: ------------------------------------------------------- > I couldn’t sleep last night over this! I was close > to tears I had no clue when I first saw this > question. I have to do this again to be sure I am > now able to hold this concept down. Many thanks > Damil, regards CP. Hold it down, dude. Let’s get it!
Could anybody post the Los this question relates to please.
Reading 47 LOS: explain and calculate the value of the equity investment in an LBO …
Tks ,it looks like Appendix 47B covers it. Is there any reason why this is item is an Appendix to reading 47?