Now let's take a look at the returns to the equity holders. Let's start by creating a year count row. I'm gonna hard code a zero here and I'm gonna simply add one to it so that I can get my year count across all five years.

Remember, column F would be 2026 and the last column is 2030. Now we need to calculate the enterprise value for each of these potential exit years. We have our assumption of exit value at the very top of the model. So let's take that number, which is 11. Let's lock that in and let's multiply that times our EBITDA in this case after one year. And don't forget to incorporate the operational improvements.

So that gives us an enterprise value at the end of year one of 67, 36 0.6. We can copy that to the right. And here is the formula that we just used. Now, to calculate equity value, we need to compute the debt of the company net of cash, of course, at the end of each of these years. Now, this model does not have really any cash at the end of any of these years, so our net debt will simply be equal to the outstanding debt of the company. To get that number, I'm gonna get the senior debt in year one, and I'm gonna add it to the junior balance of debt in year one. Now, the difference between the enterprise value and the net debt will give me my equity value, and that for year one is 43 75. Let's take those two formulas, copy them to the right, and let's show the formulas over here. Now that we have the equity value that shareholders will receive in any of these potential exit years, we can go ahead and compute our IRR for this LVO model. So before we can get our IRR calculation, we need to figure out what the cash flow is to the equity holders, in this case, the private equity firm. So in 2025 or year zero, we actually have an equity investment which we can get from our sources of funds, and that's 3.3, 3.4 billion. And that should be of course, a negative entry. 'cause we are actually investing that money now for the future years in this cashflow line. We only get to exit the investment once, and we've assumed that is in year three. So for the other years, we should not have an equity value in the cell. So the way we're gonna build the Formula is we're gonna say if the exit year that you are in is equal to the assumption of exit year that we have at the very top, that would be year three, and let's lock that in. Then we wanna bring down the equity value, otherwise put a zero in its place. So of course in year one, that's gonna be a zero. When we copy this to the right, you will see that the equity value will appear only in year three, which is our assumption of the exit year. So now we are ready to calculate the IRR of the PE firm for this target company, and let's do that right over here. Now for that we can use the Excel function IRR and simply select the entire cashflow line, and that gives us an IRR of 21.4%. Now if you recall in the handout, we were asked to identify potential targets that would yield an IRR of 20 or more percent. Now in this model, however, we're not yet done. If you remember, our interest expense switch, which is up here in row 74, is turned off. So before we can actually look at the final IRR for the target, we need to switch this thing on. So let's go to our info tab where we have our entry for the circular switch. Let's make that a one to turn it on. Make sure that your iterations are turned on at this point so that Excel is able to solve the circular formula. Let's go back to our template and now we can see the interest expense is actually running through the model. Now that's gonna be an expense which will lower your income and it will lower your cash flow available for debt repayment. So this is gonna have an impact on your output. In this case your IRR. So let's go back down and look at how the IRR changed. And as you can see here, the IRR is actually 18.9, which is below the required threshold.