Plz help in solving this question

Bhav Bhuti Sharma (Towards Professionalism )   (823 Points)

28 September 2013  



Leveraged Buyout

Sun Ltd. is a successful publicly traded manufacturer of consumer durables. It acquired a smaller company Moon Ltd., manufacturing glassware. However, Moon Ltd. did not fit into its mould and suffered for a number of years. In the year 2012, a small group of disappointed executives of Moon Ltd. began to consider a leveraged buyout. Sun Ltd. was ready to consider the divestiture as it was never comfortable with Moon's product line. Moon Ltd. always had stable production costs and good contribution margins which consistently resulted in a strong and steady cash flow. Though, the production equipment was old it was in a good condition. Moon Ltd. was always managed well and had very little debt. The following financial information for the year 2012 is available for Moon Ltd.:

Revenues =                              ` 80 lakhs 
EBIT =                                       ` 12 lakhs 
Net Income = `                           7.2 lakhs
After negotiations the purchase price was settled for ` 30 lakhs. Because of the high 
replacement cost of its assets, its strong cash flow, and its relatively unencumbered balance 
sheet Moon Ltd. was able to take on large amount of debt that banks supplied nearly ` 20 lakhs 
of the senior debt at an interest rate of 13%. This was secured by finished goods inventory, 
plant and equipment and was amortized over a five year period. An insurance company also 
provided a loan of ` 6 lakhs in the form of subordinated debt. Finally the management of the 
company took an equity position of ` 5 lakhs. Assume tax rate is 36% and depreciation is 
calculated on a straight line basis over a period of 15 years. 
Estimate the value of the firm after the Leveraged buyout