a)

Year 1 2 3 4 5 – Infinity ₦m ₦m ₦m ₦m ₦m Sales (see workings) 84.00 87.40 90.00 91.80 91.80 Operating profit 6.72 7.87 9.00 9.18 9.18 Tax at 20% (1.34) (1.57) (1.80) (1.84) (1.84) Depreciation 2.00 2.00 2.00 2.00 2.00 Operating cash flow 7.38 8.30 9.20 9.34 9.34 Replacement non-current assets (2.00) (2.00) (2.00) (2.00) (2.00) Capital expenditures (0.20) (0.20) (0.08) (0.04) (0.00) Working capital (0.24) (0.17) (0.10) (0.07) (0.00) Free cash flow 4.94 5.93 7.02 7.23 7.34 PVF at 10% 0.909 0.826 0.751 0.683 6.830* PV 4.49 4.89 5.27 4.94 50.10

₦m Total PV 69.69 Add short-term investment 0.80 Less market value of debentures = ₦10m × 95/100 = (9.50) Total value of equity 60.99 (* Annuity factors at 10% years 5 – infinity)

Workings

Year 0 1 2 3 4 5 – Infinity ₦m ₦m ₦m ₦m ₦m ₦m Sales* 80.0 84.0 87.4 90.0 91.8 91.8 Sales increase – 4.0 3.4 2.6 1.8 0 Capital expenditure* – 0.20 0.20 0.08 0.04 0 Additional working capital* – 0.24 0.17 0.10 0.07 0

(* applying the given rates)

b) An MBO can be financed using the following methods i) Private loan Members of the buyout team use unsecured and secured personal loans to fund the MBO. For secured lending, team members will provide their homes, pension plans and other non-cash assets as collateral; ii) Business loan Business loans from bank or finance companies may be obtained to fund the transaction. Depending on the track record and the type of business being purchased, unsecured lending may be possible. However, unsecured lending is generally much smaller than secured lending and, in many cases, the lender will take a lien on the company and all its assets, including its sales ledger, to secure the borrowing. Loan terms are typically 3 to 5 years. iii) Asset finance Leveraging against the assets in the company, such as property, stocks, or receivables. If the business owns substantial assets, those assets may be used as collateral for borrowing. This type of arrangement is called a leveraged buy-out, as the company’s assets are leveraged to buy out the old owner. iv) Private equity (PE) This is a steadily increasing source of finance even at the smaller end of the market. Cash is provided by venture capitalists, hedge funds and private investors in exchange for shares, board seats, dividends, fees, and varying degrees of control. v) Mezzanine finance A hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default, generally, after venture capital companies and other senior lenders are paid. vi) Seller loan Also called vendor loans. The seller helps to fund the transaction by leaving some of their consideration in the company as loan notes to be repaid over time. In effect, their ownership reduces over an extended period. The old owner may retain a degree of control until they are completely paid out. (Note: For a question of 3 marks, the above points are certainly too detailed. They are included for educational purposes).