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FRM Part I · FRM Exam Part I · Fund Management

A leveraged buyout acquires a company for an enterprise value of $500 million using $300 million of debt and $200 million of equity. After five years the enterprise value is $700 million and debt has been paid down to $200 million. Ignoring fees and interim cash flows, what is the equity multiple (money multiple) on the sponsor's equity?

The equity multiple is 2.50x. Exit equity value equals the $700 million enterprise value less $200 million remaining debt, or $500 million, divided by the original $200 million equity investment. The gain comes from both enterprise value growth and debt paydown, which magnify returns relative to the unlevered asset.

  1. A2.50xCorrect
  2. B3.50x
  3. C2.00x
  4. D1.40x

Explanation

Exit equity = 700 - 200 = $500 million. Multiple = 500/200 = 2.50x. Using 700/200 = 3.5x forgets to subtract debt. Using 700/500 = 1.4x measures only the change in enterprise value.

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