In this workout we're asked to calculate IRRs and fill in the table for the four scenarios below So we've got the case at entry and we've then got the case for four different exit scenarios Let's work out the enterprise value at entry, that's going to be your entry EBITDA times by your EBITDA multiple We can then calculate the debt to EBITDA multiple, if this was too high then debtholders wouldn't be willing to lend to us So I take the debt amount and divide that by EBITDA That's five times at the moment, we're normally expect the threshold (the maximum threshold) to be 5/6 times So that's okay! And we can now calculate the equity required at entry, this is crucial for our IRR calculation So that's going to be your enterprise value subtract the debt We're going to go in with 600 of equity Let's copy those to the right and we'll see similar figures for cases 1, 2, 3 and 4 Okay We're going to be exiting in year 3 in each cash, so we now need to calculate the IRR For that I open my brackets and I want to take my exit equity, divide that by the entry equity and I'm going to lock onto that I now take that to the power of one divided by the exit year And then subtract one, so what's the internal rate of return? It is 13.6%, not very high We're really looking for something above 20/25%, so let's look at exit case 2, 3 and 4 Hey, and I've copied that formula to the right and exit case 2 and 3 are looking a lot better Let's calculate the actual value created then, so that's going to be my exit equity, subtract the entry equity (I'm going to lock that) 218 case 1, copy right. We've got much better figures in 2 and 3 So the next question we says to calculate the extent to which each variable below has contributed to value creation So we start with debt repayment, for this I'm going to start with debt at entry (I'm going to lock that) Subtract debt at exit, I'm assuming the debt will go down, that's why I'm taking entry minus exit So zero in case 1, but as I copy to the right I can see in cash 2 and 3 they forecast being able to pay down quite a bit of debt Now let's move on to EBITDA improvement EBITDA improvement I hit equals, I open bracket and I want to take my exit EBITDA Subtract the entry EBITDA (lock onto that), I then want to multiple that by entry EBITDA multiple Again I'm going to lock onto that So 280 and we notice that is exactly the same as the total value created for exit case 1 Copy that right and we've got some similar figures in the other cases Let's move onto our third contribute factor multiple expansion For this one I want to take my EBITDA multiple at exit, subtract EBITDA multiple at entry (lock onto that) And I then want to multiply that by my EBITDA at exit Zero for case 1 and as I copy to the right, I can see that's given me some value of 300 in case 2 and unfortunately negative value in case 4 I now want to add up those three contributing factors and I can see that the total figures here Add up to exactly the same figures as the total value created earlier So we can see where the value is coming from, in case 1 it's just coming from EBITDA improvement In case 2 it's coming from debt repayment and multiple expansion In case 3, a lot of value is coming from debt repayment (quite a bit from EBITDA improvement) And in case four, we've got the same EBITDA improvement contributing for the value But multiple contraction has negated all of that and given us a negative value creation