A target was purchased for $1,500.0m with an equity contribution of $500.0m, and by year 5 $500.0m of cash flow was used to repay debt.Assuming the sponsor sells the target for the enterprise value, what is the value of the sponsor's equity?

Question

Quizplus · Accepted Answer

The sponsor's equity value is calculated by subtracting the debt repaid from the enterprise value and adding the equity contribution. Initially, $1,000.0m of debt ($1,500.0m purchase price - $500.0m equity contribution). By repaying $500.0m, the remaining debt is $500.0m. Selling the target for its enterprise value ($1,500.0m) and subtracting the remaining debt ($500.0m) leaves $1,000.0m as the value of the sponsor's equity.

A Target Was Purchased for $1,500