Question

You are considering buying a company using leveraged buyout. The company is projected to have sales of 500 million each year in the three years after buyout. The cost of sales and other administrative expenses are 60% of the sale. Depreciation and amortization are 5% of the sale. Tax rate is 40%. Suppose that the change in net working capital and capital expenditure each year is zero. If you borrow 1.5 billion at interest rate of 8% per year, and you use all the cash flow to repay debt.

What is the net income in the first year after the buyout?

Answer 1

Net income= $33 million

Step-by-step explanation:

A leveraged buyout is a buyout of an entity by it's own managers/board members mostly through debt financing. Now the expected sales after the buyout is 500 million, we are asked to calculate net income only in the first year. First of all lets see what net income is. Net income is the remaining amount of income after having paid all the expenses which is mostly the residual income available for either distribution to shareholders or transfer to retained earnings.

The formula for net income is as follows:

Net income/profit= Sales revenue - COGS - Administrative expenses- depreciation and amortization - Interest expense - Tax

Let first calculate COGS & other administrative expense, depreciation and interest expenses first.

COGS & ADMIN: 500*0.6=300 m

Depreciation: 500*0.05 =25m

Interest expense for the year: 1500 * 0.08= 120m

Now lets substitute values in the formula mentioned above:

Income before taxes: 500m - 300m - 25m - 120m

Income before taxes: 55m

Income after taxes; 55m - 22m (taxes= 55*40%)

Net income= $33 million