IRR Calculations

Question 1

How do you calculate the internal rate of return (IRR) in an LBO model, and what does it mean?

Answer 1

effective annual compounded interest rate

Question 2

A PE firm acquires a $100 million EBITDA company for a 10x purchase multiple and funds the deal with 60% Debt.
The company’s EBITDA grows to $150 million by Year 5, but the exit multiple drops to 9x. The company repays $250 million of Debt in this time and generates no extra Cash.

What’s the IRR?

Answer 2

$1 billion / $400 million

approximately 20%.

Question 3

A PE firm acquires a $200 million EBITDA company using 50% Debt, at an EBITDA purchase
multiple of 6x.
The company’s EBITDA grows to $300 million by Year 3, and the exit multiple stays the same.
Assuming the company pays its interest and required Debt principal but generates no additional Cash, what is the MINIMUM IRR?

Answer 3

2x multiple over 3 years.
~25% IRR

Question 4

You buy a $100 EBITDA business for a 10x EBITDA multiple, and you believe you can sell it in 5 years for a 10x multiple.
You use 5x Debt / EBITDA to fund the deal, and the company repays 50% of that Debt over 5
years.

By how much does EBITDA need to grow over 5 years for you to realize a 20% IRR?

Answer 4

EBITDA must grow to $150 over 5 years