Reference no: EM131903988

VANS is a privately owned manufacturer of light trailers that are sold to rental companies and individuals. Its sole owner, Mr. Benjamin Webster is presently considering a purchase offer from Prentice Works. The offer for the equity of VANS is as follows:

A cash payment for $5 million due at closing.

A 7.5% annual coupon five-year subordinated note issued by Prentice Works, for $7 million with principal payable at maturity.

An earnout agreement stipulating a payment to take effect at the end of the third year equal to one-half times third year EBITDA.

Prentice Works will assume VANS’s present net debt of $14.8 million. Furthermore, VANS will become a wholly owned subsidiary of Prentice and Mr. Webster will stay as its president with a three-year contract and competitive compensation, at the end of which he will retire.

The following additional information is available:

Prentice Works’ outstanding subordinated notes are presently priced to yield 10%.

Mr. Webster believed that he could make VANS’s EBITDA grow at 11% per year during the following three years. Current EBITDA is $6 million.

Small companies with characteristics similar to VANS have a WACC of about 14%.

1) What is the value of the 7.5% $7 million note offered by Prentice Works?

2) What is the value of the earn out agreement?

3) How much is Prentice Works offering for the enterprise (debt plus equity) of VANS? What is the initial EBITDA multiple offered by Prentice?