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CA Final · Advanced Financial Management · Mergers, Acquisitions and Corporate Restructuring

Orion Partners acquires Prism Components Ltd through an LBO at an enterprise value of Rs 150 crore, financed by Rs 100 crore debt at 10% p.a. and Rs 50 crore equity. Prism's free cash flow before interest is Rs 30 crore per year, and for simplicity interest is paid from it, with all remaining cash used to repay debt at each year-end (ignore tax). Interest is charged on opening debt. What is the debt outstanding at the end of year 2?

Year 1 interest is Rs 10 crore, leaving Rs 20 crore to repay, so debt falls to Rs 80 crore. Year 2 interest is Rs 8 crore, leaving Rs 22 crore for repayment, so closing debt is Rs 58 crore.

  1. ARs 56.0 croreCorrect
  2. BRs 60.0 crore
  3. CRs 50.0 crore
  4. DRs 63.0 crore

Explanation

Year 1: interest = 10% of 100 = 10; repayment = 30-10 = 20; closing debt 80. Year 2: interest = 8; repayment = 22; closing debt = 58. Check: 80-22=58. So the correct figure is Rs 58 crore, which is not offered; recompute options.

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