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Company M has Assets of R160m which are financed entirely by Equity i.e. the company...

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Finance

  1. Company M has Assets of R160m which are financed entirely by Equity i.e. the company has no debt.

A Private Equity company wishes to do Leverage Buy-out to acquire the assets of Company M. Assume the following:

  • Company M has an average Earning Before Tax (EBT) of R20m
  • Company M is subject to a tax rate of 28%
  • The Private Equity Firm wishes to finance the purchase of Company M with 75% debt and 25% equity.
  • Assume interest on debt is 10% p.a.

By how much would the private Equity Firms Yield on the investment using Leverage exceed the Yield if the acquisition was made with cash only?

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