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

Sunrise Equity buys Delta Pumps Ltd in an LBO for Rs 120 crore, funded by Rs 90 crore debt and Rs 30 crore equity. After 5 years, the debt has been fully repaid from cash flows and the business is sold for Rs 210 crore. Ignoring interim dividends, exit costs and tax, what is the sponsor's IRR (approximately) on the equity invested?

Since debt is fully repaid, the sponsor receives all Rs 210 crore against Rs 30 crore invested, a 7 times multiple. The fifth root of 7 is about 1.476, so the IRR is roughly 47.6% per year.

  1. A47.6%Correct
  2. B32.4%
  3. C11.8%
  4. D60.0%

Explanation

With debt fully repaid, equity receives Rs 210 crore against Rs 30 crore invested. Multiple = 7.0x. IRR = 7^(1/5) - 1. Since 1.476^5 = approx 7.0 (1.476^2=2.178; ^4=4.745; ^5=7.00), IRR is about 47.6%. The 11.8% option wrongly uses the enterprise return 210/120 = 1.75x over 5 years, ignoring leverage.

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