Expected return on the equity of the target company

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You analyze a leverage buyout. The transaction is expected to close at the end of 2021, and the PE firm is expected to exit its investment at the end of 2026. During the holding period, the target's EBITDA is expected to grow at annual rate of 6% and its debt level is expected to decline every year until the exit. Based on your analysis, the PE's IRR from this buyout is expected to be 17%. Suppose that the liquidity premium on a private equality investment is 0%. Which statement must be true?

a) If the expected return on the equity of the target company at the end of 2021 is 15%, then the buyout is a positive NPV from the PE firm's perspective.

b) If the expected return on the equity of the target company at the end of 2023 is 19%, then the buyout is a positive NPV from the PE firm's perspective.

c) None of the statements above.

d) If the expected return on the equity of the target company at the end of 2026 is 11%, then the buyout is a positive NPV investment from the PE firm's perspective.

Reference no: EM133114229

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