Quick IRR Calculation in LBO Models

[@zhongshicong6168]

This video series are brilliant, thank you so much Brian!

[@financialmodeling]

Thanks for watching!

[@alexandralyu836]

thanks for this valuable sharing

[@financialmodeling]

Thanks for watching!

[@zachme1n]

dumb question... Why does the compound rate decrease on the higher rates of return?

[@financialmodeling]

Compounding has a greater effect the higher the rate of return. I think you might have this reversed unless I am misinterpreting your question. The reason is that if it's, say, a 30% annual return, the running balance of the investment increases by a lot more each year than if it's a 10% return. So you see a greater and greater impact from the balance itself increasing over time.

[@StayPolishThinkEnglish]

4:03 I am curious in here. You are saying that it's roughly calculated and it gives you 2.9 x multiple. Why is there so long formula? I've seen like 3 movies with Cash on Cash multiple and it's everythere this way. Could you explain it?

[@financialmodeling]

I'm not really sure what you're asking. If you have a long series of cash flows in Excel, you need to sum them up to calculate the multiple, so the SUMIF formulas will always look long if that's the case.

[@StayPolishThinkEnglish]

@@financialmodeling So that's what you put. I get it. Thanks a bunch!

[@TheRasins]

Hi Brian, for the 3.5hr case study as shown in the video, where can I find this please? Am interested to take a further look. Many thanks!

[@financialmodeling]

It's not available in this channel. It was a small excerpt taken from one of our courses/guides.

[@jyoyoj]

hi brian! thanks for the upload. for the excel model shown, it seems that you didn't take into account the ending cash balance for the exit equity value calculation. assuming no interest on cash, the exit equity value should be 475.6mm due to cash balance of 90.2mm

[@financialmodeling]

A time stamp would help if you want a response on something this specific

[@enzomodesto3241]

Where can I get my hands on this case study?

[@financialmodeling]

There is no accompanying Excel file here. Please see some of the other LBO-related lessons for Excel examples.

[@zziemke]

In the first example - how do we know that we can skip the Free Cash Flow calculation and just assume there is no additional cash gerneration on top of the debt payback?

[@financialmodeling]

There probably will be some FCF generated, but quick mental math indicates that it is likely very low: -EBITDA of 50 million growing to ~70 million. -D&A + Interest add up to almost 30 million per year, and the tax rate is 20%, so you're looking at 20 million - 30 million in Net Income. -Change in WC is not that big, and the PIK Interest, D&A, and CapEx roughly offset each other based on the percentages. -So... FCF is probably in the 20 - 30 million range per year. We also have 90 million of total loan amortization over 3 years. -Therefore, we're unlikely to generate much, if any, excess cash after paying for the loan principal, so we ignore it in this question.

[@zziemke]

@@financialmodeling thanks!

[@leoszeto1572]

Hi Brian, is this video in any of the BIWS courses?

[@financialmodeling]

Not directly, but it's in the written LBO guide and some of it is in the intro lesson to LBO models.

[@xstriker831]

Could I ask, how did you arrive at the 30mil each for term loans A,B and C? Should it be 50mil each instead given that LTM EBITDA is 50mil with 1.0x LTM EBITDA for term loans A, B and C each? Hence remaining debt at year 3 = $225mil - $150mil = $75mil

[@financialmodeling]

Term Loans (almost) always have annual amortization. In this case, Term Loans A, B, and C each amortized by 10 million per year. So, by the end of Year 3, 30 million of Term Loan A, 30 million of Term Loan B, and 30 million of Term Loan C have amortized. The starting Debt balance was 225 million, so the remaining balance by Year 3 is 225 - 90 = 135 million. This is not exactly right because of the PIK Interest on one of the Debt tranches, but it's close enough.

[@mariogotze6588]

Sorry if this is a rather ignorant question but what math did you use to arrive at an EBITDA of 70M?

[@financialmodeling]

Which part are you referring to? The simple example in the beginning? The 70M figure there is arbitrary, it was given to us in the question or case study prompt.

[@Eduardozco]

Can't you use log to solve this?

[@financialmodeling]

Only if it's a simple scenario with a single cash outflow and inflow, and assuming you can easily calculate logarithms without using a calculator. In a time-pressured interview setting where you have a few seconds to answer, it's easier to use the approximations to answer.

[@Eduardozco]

@@financialmodeling Fair enough! Thanks!

[@petercloud7651]

The easy answer is 'the rule of 72'

[@financialmodeling]

Yes, that also works, but in most LBO contexts, it's faster to know the simple rules for 2x and 3x multiples over 3 and 5 years and estimate from there.