Question

Assume a firm has a required minimum IRR on their investment if 25%. If they had purchased a company for 300 million, financed with 200 million in debt, and they assume they can exit the company at a 6x Exterprise Value to EBITDA multiple. Assume the company has paid down 125 million in debt over the past 5 years. What is the minimum EBITDA they would need five years from now to make their goal?

Answer 1

Purchase Value = $ 300 million, Equity Contribution = $ 100 million and Debt Financing = 300 - 100 = $ 200 million

In this scenario, the firm is utilizing EV/EBITDA multiple to determine its exit value, thereby implying that the firm concerns itself with the entire firm value (in the form of the firm being exited's EV) rather than just its equity value(or debt value). Consequently, the initial investment outlay will comprise of the entire $300 million in investment (instead of just the initial equity or debt contribution), as the EV provided by the exit multiple will embody returns to both the firm's equity and debt holders. This, in turn, would mean that debt repayment details mentioned here are inconsequential and the total time period under consideration is from the time of initial investment to five years later, which is a tenure of (5+5) = 10 years.

IRR = 25%

Therefore, Initial Investment = EV / (1+IRR)^(10)

300 = [6 x Required EBITDA / (1.25)^(10)]

Required EBITDA = [300 x (1.25)^(10)] / 6

Required EBITDA = $ 465.6613 million