ACCA Strategic Professional · Advanced Financial Management · Business re-organisation
Target Ltd is bought in an LBO for an enterprise value of 100m, with 70m debt at 8% interest and 30m equity. Annual EBITDA is 20m. Depreciation and capex are both 4m, tax is 25% of profit after interest, and working capital change is nil. All free cash after interest and tax is used to repay debt. What is the debt repayment in year 1 (given interest on the opening debt)?
Interest is 5.6m, profit before tax is 10.4m and tax is 2.6m. Cash available is 20 less 5.6, 2.6 and 4 capex, giving 7.8m, so no option shown is correct.
- A9.6mCorrect
- B6.4m
- C12.4m
- D16.0m
Explanation
Interest = 70 x 8% = 5.6m. Profit before tax = 20 - 4 - 5.6 = 10.4m. Tax = 2.6m. Cash flow = EBITDA 20 - interest 5.6 - tax 2.6 - capex 4 = 7.8m. Hence repayment is 7.8m, not any listed option.
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