Question

An equity investor is considering purchasing a company which has $1,400 of EBITDA for a 7x multiple. The investor is willing to invest $4,000 of equity. Assuming 3 years from now EBITDA is $1,600 and the company is sold for a 7x multiple, what will be the equity return assuming debt was paid down to $5,000?

Answer 1

To calculate the equity return, we need to determine the purchase price for the company and the sale price for the company in three years.

The purchase price for the company is calculated by multiplying the EBITDA by the multiple:

$1,400 x 7 = $9,800

The equity investment is $4,000, so the remaining amount is financed through debt:

$9,800 - $4,000 = $5,800

After three years, the EBITDA is $1,600, and the multiple is still 7, so the sale price for the company is:

$1,600 x 7 = $11,200

If the debt is paid down to $5,000, then the equity value is:

$11,200 - $5,000 = $6,200

The equity return is the final equity value minus the initial equity investment, divided by the initial equity investment:

($6,200 - $4,000) / $4,000 = 0.55 or 55%

So the equity return is 55%.