I was recently in an interview and asked to calculate the PF free cash flow in the following scenario.

Acquisition Scenario and Assumptions

  • EBIT: $40mm
  • D&A: $10mm
  • CapEx: $10mm
  • Change in Working Capital: $0
  • Tax Rate: 40%
  • Transaction Multiple: 5.0x EBITDA (assuming no cash or debt transaction)
  • Debt: $150mm (based on transaction multiple and 40% equity check), 100% bank debt, split between Term Loan A and Term Loan B
  • Term Loan A: $75mm, 8% cost of debt, amortizes over 10 years
  • Term Loan B: $75mm, 10% cost of debt
  • Financing Fees: 2.5%, amortized over 10 years

Calculate Pro Forma Free Cash Flow with Term Loan A and Term Loan B

There are a couple of ways to approach this scenario, from an operational or investor perspective. In an interview, be sure to explain which the rationale for your approach as you are walking the interviewer through your response. The answer below uses an operational approach.

Calculate Net Income:

    EBITDA: 50 mm
    - D&A: 10 mm
    - Financing Fees Amort: .375 mm
    = EBIT: 39.625 mm
    - IntExp Term Loan A: 6 mm
    - IntExp Term Loan B: 7.5 mm
    = EBT: 26.125 mm
    - Taxes: 10.45 mm
    = Net Income: 15.675 mm

Calculate FCF:

    Net Income: 15.675 mm
    + D&A: 10 mm
    + FinFeeAmort: 0.375 mm
    + NWC: 0 mm
    - Capex: 10 mm
    - TLA Amort: 7.5 mm
    - TLB Amort: 0 mm
    = FCF: 8.55 mm

Learn More About LBOs and FCF

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