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By how much would the private equity firm yield

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Question - Company M has Assets of R160m which are financed entirely by Equity i.e. the company has no debt.

A Private Equity company wishes to do Leverage Buy-out to acquire the assets of Company M. Assume the following:

Company M has an average Earning Before Tax (EBT) of R20m

Company M is subject to a tax rate of 28%

The Private Equity Firm wishes to finance the purchase of Company M with 75% debt and 25% equity.

Assume interest on debt is 10% p.a.

By how much would the private Equity Firm's Yield on the investment using Leverage exceed the Yield if the acquisition was made with cash only?

Reference no: EM133174529

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