CFA Level 2
Alternative Investments

Leveraged Buyout Valuation Difficulty

Very Hard Private Equity Valuation Leveraged Buyouts

During the evaluation of a potential leveraged buyout (LBO) for a mid-sized manufacturing company, investors are estimating the enterprise value (EV) based on projected future cash flows and exit multiples. The operations are expected to generate increasing free cash flows of $5 million, $6 million, and $7 million over the next three years. After that, they anticipate stable cash flows growing at a perpetual growth rate of 3%. The investors use a target internal rate of return (IRR) of 20% to determine the present value of the cash flows. Additionally, the exit multiple based on comparable companies is set at 8 times the year-three free cash flow.

Given this information, what is the estimated enterprise value of the company at the time of acquisition?

Hint

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