Accounting Question

Please follow the attachment for questions and answer them in deatails.

Roll Up (in Millions of Dollars)
Company
A
B
C
Revenues
COGS
Gross Profits
$5,000
$2,500
$2,500 1. _50_%
$8,000
$3,000
$5,000 2. ____%
$12,000
$5,000
$7,000 __.__%
SG & A
Marketing
Depreciation
$1,000
$250
$350
$2,500
$400
$600
$3,000
$800
$800
Operating Profit
Taxes
$900
20%
$1,500
20%
$2,400
20%
Net Profit
+ Add Backs
$720
$350
$1,200
$600
$1920
$800
Cash Flow
Multiple
2-4. Acquisition Valuation
$1,070
x4
_____
$1,800
x5
_____
$2,720
x6__
_____= ________
CapEx
Working Capital
$570
$200
$480
$120
$720
$200
Free Cash Flow
$300
$600
$1,800
Operating Expenses
+
+
Assignment:
1. Calculate the Gross Margin % for each company (1.,2., and 3.)
2. Using the multiple given, calculate the Acquisition Valuation of Company A. ___
3. Using the multiple given, calculate the Acquisition Valuation of Company B. ___
4. Using the multiple given, calculate the Acquisition Valuation of Company C. ___
5. What is the total acquisition of A, B and C? _______
6. Using 25% Equity and 75% debt, what is the total amount of equity used for acquiring
A, B and C? __$7,400_____
7. Using 25% Equity and 75% debt, what is the total amount of debt used for acquiring A, B
and C? ______
8. Company A has ADD BACKS of: $110 in COGS; $250 in SG & A; $50 in Marketing. Adding
these to Net Profit ($720) and Depreciation ($350) gives us how much in total Cash
flow? __$1,480________
Multiply the new Cash Flow (with Add Backs) by 4 to determine the Actual Valuation.
__$___
What is the Margin of safety? (Delta between Acquisition Value and Actual Valuation
with Add Backs). __$1,640____
9. Company B has ADD BACKS of: $250 in COGS; $250 in SG & A; $50 in Marketing. Adding
these to Net Profit ($1,800) and Depreciation ($600) gives us how much in total Cash
flow? __$__
Multiply the new Cash Flow (with Add Backs) by 5 to determine the Actual Valuation.
___$14,750__
What is the Margin of safety? (Delta between Acquisition Value and Actual Valuation
with Add Backs). __$____
10. Company C has ADD BACKS of: $400 in COGS; $350 in SG & A; $150 in Marketing. Adding
these to Net Profit ($2,720) and Depreciation ($800) gives us how much in total Cash
flow? __$4,420__
Multiply the new Cash Flow (with Add Backs) by 6 to determine the Actual Valuation.
___$__
What is the Margin of safety? (Delta between Acquisition Value and Actual Valuation
with Add Backs). __$9,930___
11. The Exit: You have rolled-up companies A, B and C into one and now have captured all
the add-backs, total add backs of company A ($1,480) + B($2,950) + C ($4,420) is
$___$________
12. Private Equity has noticed your roll up has grown and you now have one large efficient
company. This gives your firm a competitive advantage in that you now source raw
materials in larger volume (obtaining discounts). They also notice you are more efficient
in that you do not require 3 CEO’s or 3 COO’s or 3 CFO’s, you only need 1 of each. They
are impressed. You also increased pricing on the finished goods you sell.
Unfortunately, after four years of running in a tough economy you did not increase
revenue one penny, rather, you only captured the inefficiencies (add-backs).
13. You decide to sell the roll up for multiple of 5x based on the totals in question 11.
Company A ($1,480) + B($2,950) + C ($4,420) is $___$8,850___x 5_____
$________
14. You must pay the leverage (debt) and interest back. Total debt was $22,220 and interest
added was $1,000. For a total of $23,220.
15. Subtract the total leverage ($23,220) from the sale price ($________) to get total
proceeds of $21,030.
16. You must subtract the total equity the Limited Partners invested into the fund (question
6) from the Total Proceeds (question 15). $21,030 – $7,400 =$_______
17. Your PE firm has a 20% Carried Interest. $________ x 20% = $2,720
18. Your Limited Partners in the Fund have a net gain of $10,904.
19. Your LP’s have a Internal Rate of Return of what %? $10,904 / $7,400 = $147% or 36.9%
per annum (over 4 years).
20. Congratulations, we acquired and sold a roll-up, we did it with low risk and _____
reward. Our insurance was to make sure we had a large Margin of _________, while
capturing a lot of inefficiencies or _______-backs. There is still a lot of Intrinsic ________
left in the roll-up; and we did it using 75% debt (aka __leverage_). Our “our insurance”.
We gave our investors (aka L__P_’s) a great return and yet it was the banks capital that
was most at risk.