LBO Case Study - Cash Balance
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Model a leveraged buyout of Red Bull using only cash and debt. Calculate the cash flow available for debt repayment, the debt repayment schedule, the ending cash balance, and the interest income.
Glossary
Debt Repayment LBOTranscript
The last thing I'm going to do is do the any cash. Now you may say, well, doesn't Red Bull have some preexisting debt and some preexisting cash? Well, we're gonna make the assumption that all that cash is swept up by the person selling the business who currently owns Red Bull. So actually what we're going to be offered is in legal speaker, kind of cash free debt-free business, the enterprise. And we are not going to be able to have to repay any existing debt. And there's gonna be no cash left in Red Bull when we acquire it. And part of the reason for that is that even if there was cash in the business, that actually would mean we'd have to pay more for Red Bull because you have to buy the cash. And most PE firms would want to immediately use that to repay debt. So from a structuring point of view, just assuming you're buying the enterprise value is a kind of simplistic way of not having to worry about repaying debt and not having to worry about paying more and then repaying or using the cash that you're buying to repay the debt. So you'll actually end up with the same answer by just assuming you are acquiring the enterprise value. Because if there is existing debt on the balance sheet, you are going to buy the business for less. Because you'll be buying the equity and if there's existing cash on the balance sheet, you're going to be paying more for the business. But then you'd use that cash to repay some of the debt immediately. So actually assuming you're buying the enterprise value is gonna give you the same result for less paying, which is always good. So the ending cash balance is going to be the opening cash balance, which was assuming a 0 because you're buying the enterprise value. And I'm going to take the cashflow available for debt repayment. Then I'm gonna add what we've used to repay the senior tranche. And I'm gonna add what we have used to repay the subordinated tranche. I'm ignoring interest because that is gonna be wired up in a minute into the income statement. So that will come out before net income. So it will be reflected in the cashflow, but we are just not gonna put that in right now because we'll generate a circularity. So I'm just gonna copy that right. And you can see once we have completely paid off the debt in 2030, we start building up the cash balance. So our interest income, we didn't have to put this in because this is actually gonna be pretty de minimis, is the interest rate on cash. Absolute reference. And I'm gonna multiply that by the average of this year and last year's cash balance and I'll copy that across.