It is more common for PE firms to increase returns by growing EBITDA, using more debt, or paying back debt. Typically, the exit multiple is assumed to be the same or lower than the entry multiple in order to be conservative. In order to justify increasing the relative valuation of a company, the PE ...

The 5 biggest drivers of IRR are:...

The main types of debt include senior debt and junior debt. Senior debt is usually provided by the banks and has priority on cash flows and assets over the junior debt. This makes it less risky than junior debt, and therefore it pays a lower interest rate. The interest is a floating rate, which is [...

The amount of debt you can raise for an LBO is driven by the stability of the company’s cash flows, the asset base of the target company, the sectors and end markets the company is exposed to, market conditions, and the terms of the debt in the credit agreement (including covenants). The stability...

Larger PE funds and / or PE firms executing LBOs in non-cyclical industries with recurring cash flows aim for 20% IRR, which is a 2.5x multiple of capital over 5 years. 25% IRR is the threshold for LBOs in more cyclical industries with higher growth rates, such as growth equity investments. This is ...

Earnings yield of the target is the reciprocal of the P/E, or 1/8=12.5% 12.5% > 12%, earnings yield of target > cost of financing Therefore the deal is accretive....

There are several reasons why the P/E ratio of the target company may be lower than that of the acquirer: Liquidity: The smaller target company may be less liquid than the larger acquiring company and have significantly less trading volume, making it harder to buy and sell the stock. Small Company R...

Industry consolidation is when smaller and more fragmented companies are being acquired by larger companies in the same industry. This often becomes a self reinforcing trend. As more and more small companies are acquired, there will be fewer and fewer left, leading to a scarcity effect where demand ...

Cost of equity of acquiror:1/10=10% Cost of acquisition capital:(50%)(10%)(1-40%)+(50%)(10%)= (5%)(60%)+(5%)= 3%+5%= 8% Earnings yield of the target:1/12=8.33% 8.33% > 8%, earnings yield of the target > cost of acquisition capitalTherefore the acquisition is accretive....

This is because interest expense is tax deductible. Any new debt raised to buy the company will result in more interest expense, which will reduce tax expense. Therefore, the true cost of debt is the after-tax of debt, which is equal to the pre-tax cost of debt x (1-tax rate)....