This workout says using the information below, Calculate the maximum premium a private equity firm will be willing to pay in a leveraged buyout of HacneyTulips Plc We've got four scenarios and there are no fees So if I need to workout the maximum premium paid, that means I need to workout the equity purchase price So how can I get there? Well in each cash we're going to firstly calculate the exit figures: exit EV, debt and and exit equity If I can then workout my exit equity value, I can workout my entry equity value by stripping out 4 years worth of the IRR That maximum equity at entry will then go into my sources of funds and I can then workout my uses of funds, being the equity purchase price And that will then give us the equity premium So starting with case 1, my enterprise value is going to be the EBITDA multiplied by our exit multiple 10.5 I can then calculate the debt at exit being the debt that we had at the beginning (debt financing available) Less the debt at exit. I'm going to lock onto that debt we had at entry Meaning in exit case 1 we've got 4,000 of debt at exit Great! I can now calculate the equity at exit, EV minus debt gives me equity exit And now I need to strip out four years worth of 20% IRR Another way to think of this is I'm working out the present value and my IRR is my discount rate So I'm going to take the 27,500, I'm then going to divide that by one plus the required 20% All to the power of the exit year So the present value of 27,500 is 13,262 Great! I can now plot that straight into my sources of funds My equity check, my debt financing (that's the 14,000 we were given right at the top) And my total sources of funds come to 27,262 Now I know that my total uses has to equal the same amount So I'm going to put in the one figure I do know which is the net debt of the target, the net debt to be refinanced was 900 So my equity purchase price will have to be the 27,262 minus the net debt Giving me a maximum equity purchase price of 26,362 Let's just check that they uses and sources are the same, and they are So if my equity purchase price is 26,362 Then my maximum purchase price per share is going to be that same figure divided by the number of shares 1,000 in total (I'm going to lock onto that) 26.36, what kind of premium is that compared to the current share price? Well we've got their current share price, 20.10 Again I'm going to lock onto that, I'm going to subtract one and that's a 31.2% premium I can do exactly the same things for case 2, 3 and 4. That means I need to lock everything I need to lock So that debt financing at the beginning, I need to make sure that is locked. And the net debt, that also needs locking Great, let's copy all of case 1 to the right Let's try and drill down into why 1 and 2 were so high and 3 and 4 were so low If we go back up to our assumptions We can see for exit case 4 the EBITDA is much lower That low EBITDA at exit gives us a low EV at exit and thus a low equity at exit If we look at exit case 3, the required IRR is 25%, it's much higher than the other cases Because of that, that means that our maximum equity at entry has to be much lower Because of that very low equity at entry, that means we get a very low equity purchase price at entry That means that we can only afford to pay a 17.1% premium So there's very low EBITDAs and a very high required IRR, requires us in both those cases to pay a lower premium