Imagine that a financial buyer is deciding between two separate investments (investment A and Investment B)...

Imagine that a financial buyer is deciding between two separate investments (investment A and Investment B) that coincidentally have the same current year EBITDA of $100.0 million. In both cases, the maximum amount of leverage allowed is 5.5x debt/current year EBITDA and the equity contribution is 30%. Investment A has an exit potential in projected year 3 with a 7.9x EBITDA exit multiple, $125.0 million in EBITDA and Net Debt of $500.0 million. Investment B has an exit potential in year in projected year 5 with a 7.9x EBITDA exit multiple, $150.0 million in EBITDA and Net Debt of $450.0 million. Assuming that the financial buyer only wants to maximize IRR, which of the following statements is true?

	a.	The buyer should take investment A
	b.	The buyer should take investment B
	c.	The buyer is indifferent between the investments
	d.	There is not enough information to make a decision

Solutions

Expert Solution

I think there are still some information that are missing like the required rate of return for each project which will be considered as the discounting factor while converting all the future cashflows to present and then compare among the projects.

So the given informations are inadequate to make any investment decisions.

The answer will be option D.

jeff jeffy answered 2 years ago

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