Problem
Assume that you acquire a (net) debt-free company for $1,000.00 with 65% of the acquisition financing (i.e., purchase price) coming from debt borrowings. You have created a five-year plan to use all extra cash flow generated by the company in any year to repay the acquisition debt. If all goes as planned (which of course it will), you expect an EBITDA of $200.00 in year five and will have paid down the acquisition debt to $520.00.
What is the rate of return on your equity investment, if the company can then be sold at the end of year five at an Enterprise Value/EBITDA multiple of 11.00?