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A private equity fund has produced the following forecasts for a potential target fora LBO prior to the LBO (pre-LBO). Data are in millions of dollars.

ByAdmin September 5, 2021September 5, 2021

Question 7

	Sep-30-2016E	Sep-30-2017E	Sep-30-2018E	Sep-30-2019E	Sep-30-2020E
EBIT	150.00	154.50	159.14	163.91	168.83
Interest	65.00	65.00	65.00	65.00	65.00
Net Income	85.00	89.50	94.14	98.91	103.83
Depreciation	90.00	92.70	95.48	98.35	101.30
Operating cash flow	175.00	182.20	189.62	197.25	205.12
Capital expenditures	-100.00	-103.00	-106.09	-109.27	-112.55
Dividend payments	-30.00	-30.00	-30.00	-30.00	-30.00
Share repurchases	-30.00	-30.00	-30.00	-30.00	-30.00
Change in cash	15.00	19.20	23.53	27.98	32.57

Note: I am assuming that taxes are zero for simplicity, so net income = EBIT –Interest.

Which option is correct?

1 point

The interest coverage ratio for this target is close to 4.

Since this target company is profitable, it is probably not a very good candidate for an LBO.

The private equity fund can increase this company’s ability to support additional debt by reducing dividend payments and share repurchases.

None of the above options is correct.

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