FIN 421: SMALL BUSINESS FINANCE
Wight: 30 Marks
Outcome:
1. Word Report (5 pages). 2. Excel Sheet. 3. Presintation (10 minutes).
Case Study:Kcoffee
LBO Model Test Instructions
A private equity firm is considering the leveraged buyout of , KCoffee a privately-owned coffee
company. In the last twelve months (“LTM”), KCoffee generated $2bn in revenue and $150
mm in EBITDA. If acquired, the PE firm believes Kcoffee’s revenue can continue to grow
15% YoY while its EBITDA margin remains constant.
To fund this transaction, the PE firm was able to obtain 4.0x EBITDA in Term Loan B (“TLB”)
financing – which will come with a seven-year maturity, 5% mandatory amortization, and
priced at LIBOR + 500 with a 2% floor. Packaged alongside the TLB is a $50m m revolving
credit facility (“revolver”) priced at LIBOR + 500 with an unused commitment fee of 0.25%.
For the last debt instrument used, the PE firm raised 2.0x in Senior Notes that carries a seven-
year maturity and an 8.5% coupon rate. The financing fees were 2% for each tranche while the
total transaction fees incurred were $15 mm.
On KCoffee’s balance sheet, there is $300mm of existing debt and $50mm in cash, of which
$30mm is considered excess cash. The business will be delivered to the buyer on a “cas h-free,
debt-free basis”, which means the seller is responsible for extinguishing the debt and keeps all
the excess cash. The remaining $20mm in cash will come over in the sale, as this is cash that
the parties determined is required to keep the business o perating smoothly.
Assume for each year that KCoffee’s depreciation & amortization expense (“D&A”) will be
5% of revenue, capital expenditures (“Capex”) requirement will be 2% of revenue, the change
in net working capital (“NWC”) will be 1% of revenue, and the tax rate will be 35%.
If the PE firm were to purchase KCoffee at 10.0x LTM EV/EBITDA on 12/31/2021 and then
exit at the exact LTM multiple after a five-year time horizon, what would the implied IRR and
cash-on-cash return of the investment be?
Resources:
Please follow the case study on the following date.
Deadlines:
Presentation: 24/5/2022.
Word report and Excel Sheet: 31/5/2022 (Before the exam time).
Good Luck,
