Final Exam Practice LBO Problem You are the chief investment officer (CIO) for Plotts Capital, a private equity firm located in Los Angeles that specializes in turnaround situations. The firm tries to find privately held firms whose owners grew their businesses too fast and ran into liquidity problems. Plotts Capital is now completing the investment of its second fund and is considering the acquisition of a local manufacturing and distribution company, Scrappy Inc. Scrappy Inc. was founded eighteen years ago and grew rapidly. Recently, however, the firm has had financial difficulties. Plotts Capital has approached the owner of Scrappy Inc. about the possible acquisition and they supplied the following set of pro forma income statements spanning the next 5 years. Final Exam Practice LBO Problem Solution Scrappy Inc. Pro Forma Income Stateme Year 0 10,000.00 EBITDA Depreciation EBIT Interest Earnings before taxes 3,950.00 Year 1 11,000.00 (3,900.00) 7,100.00 (3,150.00) Year 2 12,100.00 (4,300.00) 7,800.00 (2,910.15) (2,575.09) (2,131.89) 4,889.85 Year 3 13,310.00 (4,700.00) 8,610.00 9,541.00 10,605.10 6,034.91 Year 4 14,641.00 (5,100.00) (5,500.00) 7,409.11 Plotts Capital decided to perform an LBO analysis based on the following assumptions: Year 5 16,105.10 (1,566.12) 9,038.98 " The firm can be purchased for five times the firm's current EBITDA of ti10 million and resold in five years for the same multiple. Plotts will finance 70% of the purchase price using debt that carries a 9% interest rate. The debt will require a cash sweep so that all available cash flow will go toward the repayment of the note. " A tax rate of 30% is assumed in all calculations. " Capex will be ti4 million per year; no investments in net working capital are anticipated. " Scrappy Inc. does not carry any excess cash and has no non-operating assets. Question: 1. What IRR and MOIC should Plotts Capital expect on its equity in the acquisition under the projections made above?