Abstract
This chapter offers a detailed discussion of a leveraged buyout (LBO) analysis, which is performed to provide an answer to the question: What is the highest purchase price that can be paid for a company to earn a compound annual rate of return that meets the investor’s risk-adjusted return requirement? The LBO analysis includes cash flow projections, terminal value projections, and present value calculations. This analysis also considers whether there is enough projected cash flow to operate the company and also pay debt principal and interest payments. In addition, the analysis determines if there is sufficient cash flow to pay dividends at some point to the private equity investor and what the proceeds to investors would be in an eventual exit. This chapter also offers a simplified example of an LBO analysis, based on the acquisition of Toys “R” Us by a consortium of buyers consisting of Kohlberg Kravis Roberts, Bain Capital, and Vornado Realty Trust in 2005.
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