PE case study: LBO modeling test 28 May 2017

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2

• Case study introduction

• Assumptions

• Walking through the model

• Q&A

What We Will Cover Today

3 Case study introduction • Typical PE case study

• Task #1: Build 5-year operating model (IS/BS/CFS)

• Task #2: DCF• Assume 12% WACC and 10x Terminal Multiple

• Task #3: LBO (including credit analysis)• Calculate 3/4/5 year IRR with an exit multiple of 12x

• Allocated time: Two hours

4 Operating assumptions Operating Assumptions 2015ARevenues 20,000$ YOY Growth 10%

COGS (Excl. Depreciation) 9,000$ % Revenue (assume declining margin to 44%) 45%

General & Administration Expenses (excl. Amortization) 1,800$ % Revenue (assume constant margin) 9%

Sales & Marketing Expenses (excl. Amortization) 1,100$ % Revenue (assume declining margin to 4%) 6%

Depreciation (Book) 1,000$ % Revenue (assume constant margin) 5%

Amortization 12$

Capex 1,750$ YOY Growth 0%

5 Other assumptions

Other Assumptions 2015AInterest Rate on Revolver 9.5%Interest Rate on Straight Debt 10.0%Interest Rate on Cash & Equivalents 4.5%Minimum Cash Balance 300$

Tax Rate 40%Dividend Per Share 0.20$ Common Shares 4,000,000 New Shares Issued (First 3 Years) 10,000 Shares Repurchases (Last 2 years) - Price per Share Issued 15.00$ Price per Share Repurchased -$

6 Opening balance sheet Opening Balance Sheet 2015ACash & Equivalents 350$ Accounts Receivable 2,800 Inventory 2,000 Other Current Assets 100 Total Current Assets 5,250

Gross PP&E 16,000 Accumulated Depreciation (3,000) Net PP&E 13,000

Goodwill & Other Intangibles 150 Other Assets 500 Total Assets 18,900

Accounts Payable 1,200 Accrued Expenses & Liabilities 400 Taxes Payable 350 Other Current Liabilities 200 Total Current Liabilities 2,150

Revolver Debt 3,100 Other Long Term Debt 8,000 Other Long Term Liabilities 400 Total Liabilities 13,650

Shareholders Equity 5,250

Total Liabilities & Shareholder Equity 18,900

7 LBO assumptions 2015 LBO Transaction Summary

Purchase Price Per Share 20.00$

Financing Assumptions Leverage Fees (Amort over 7 Yrs)Bank Debt 3.00x 2%Subordinate Debt 2.00x 3%PIK Sub Debt 2.00x 3%Total Leverage 7.00x

8 Inputs and Sources & Uses Assumptions Debt Mult Rate FeesEntryYear 11.2x 2015 Revolver 0.0x 9.5% 0.0%ExitYear 12.0x 2020 BankDebt 3.0x 10.0% 2.0%AmortizationPeriod 7 SubDebt 2.0x 10.0% 3.0%InterestRateonCash&Equivalents 4.5% PIKSubDebt 2.0x 10.0% 3.0%ManagementOptions 0.0% TotalLeverage 7.0xMinimumCashBalance $0.0DividendPerShare $0.0CommonShares 4,000.0 PurchasePriceAssumptionsNewSharesIssued(First3Years) 10.0 PurchasePrice 20.0SharesRepurchases(Last2years) 0.0 Shares 4,000.0PriceperShareIssued $15.0 EquityValue 80,000.0PriceperShareRepurchased $0.0 Plus:NetDebt 10,750.0TaxRate 40.0% TEVatClosing 90,750.0Circular? Yes Implied2015AEBITDAMultiple 11.2x

Sources Amount Mult % UsesRevolver 0.0 0.0x 0.0% PurchaseEquity 80,000.0BankDebt 24,300.0 3.0x 26.3% RefinanceDebt 11,100.0SubDebt 16,200.0 2.0x 17.5% TransactionFees 1,458.0PIKSubDebt 16,200.0 2.0x 17.5%CashUsed 350.0 0.0x 0.4%SponsorEquity 35,508.0 4.4x 38.4%TotalSources 92,558.0 11.4x 100.0% TotalUses 92,558.0

9 Income statement IncomeStatement 2015 2016E 2017E 2018E 2019E 2020ERevenues 20,000.0 22,000.0 24,200.0 26,620.0 29,282.0 32,210.2%Growth 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

COGS(Excl.Depreciation) 9,000.0 9,856.0 10,793.2 11,819.3 12,942.6 14,172.5%Revenue 45.0% 44.8% 44.6% 44.4% 44.2% 44.0%

GrossProfit 11,000.0 12,144.0 13,406.8 14,800.7 16,339.4 18,037.7%Margin 55.0% 55.2% 55.4% 55.6% 55.8% 56.0%

G&A(excl.Amortization) 1,800.0 1,980.0 2,178.0 2,395.8 2,635.4 2,898.9%Revenue 9.0% 9.0% 9.0% 9.0% 9.0% 9.0%

Sales&Marketing(excl.Amortization) 1,100.0 1,144.0 1,185.8 1,224.5 1,259.1 1,288.4%Revenue 5.5% 5.2% 4.9% 4.6% 4.3% 4.0%

EBITDA 8,100.0 9,020.0 10,043.0 11,180.4 12,444.9 13,850.4%Margin 40.5% 41.0% 41.5% 42.0% 42.5% 43.0%%Growth 11.4% 11.3% 11.3% 11.3% 11.3%

Depreciation(Book) 1,000.0 1,100.0 1,210.0 1,331.0 1,464.1 1,610.5%Revenue 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Amortization 12.0 12.0 12.0 12.0 12.0 12.0

EBIT 7,088.0 7,908.0 8,821.0 9,837.4 10,968.8 12,227.9

FinancingFees 208.3 208.3 208.3 208.3 208.3PIKInterest 1,620.0 1,782.0 1,960.2 2,156.2 2,371.8CashInterestExpense 3,932.4 3,654.0 3,282.7 2,812.3 2,227.4

EBT 2,147.4 3,176.8 4,386.2 5,791.9 7,420.4Taxes 858.9 1,270.7 1,754.5 2,316.8 2,968.1NetIncome 1,288.4 1,906.1 2,631.7 3,475.1 4,452.2

10 Balance sheet & Goodwill calc BalanceSheet 2003 + /- 2015PF 2016E 2017E 2018E 2019E 2020EAssets:Cash&Equivalents 350.0 (350.0) 0.0 0.0 0.0 0.0 0.0 0.0AccountsReceivable 2,800.0 2,800.0 3,080.0 3,388.0 3,726.8 4,099.5 4,509.4Inventory 2,000.0 2,000.0 2,190.2 2,398.5 2,626.5 2,876.1 3,149.4OtherCurrentAssets 100.0 100.0 110.0 121.0 133.1 146.4 161.1TotalCurrentAssets 5,250.0 4,900.0 5,380.2 5,907.5 6,486.4 7,122.0 7,819.9

GrossPP&E 16,000.0 16,000.0 17,750.0 19,500.0 21,250.0 23,000.0 24,750.0AccumulatedDepreciation (3,000.0) (3,000.0) (4,100.0) (5,310.0) (6,641.0) (8,105.1) (9,715.6)NetPP&E 13,000.0 13,000.0 13,650.0 14,190.0 14,609.0 14,894.9 15,034.4

Goodwill&OtherIntangibles 150.0 74,750.0 74,900.0 74,888.0 74,876.0 74,864.0 74,852.0 74,840.0OtherAssets 500.0 500.0 500.0 500.0 500.0 500.0 500.0UnamortizedFinancingFees 0.0 1,458.0 1,458.0 1,249.7 1,041.4 833.1 624.9 416.6TotalAssets 18,900.0 94,758.0 95,667.9 96,514.9 97,292.5 97,993.8 98,610.9

Liabilities&SE:AccountsPayable 1,200.0 1,200.0 1,314.1 1,439.1 1,575.9 1,725.7 1,889.7AccruedExpenses&Liabilities 400.0 400.0 438.0 479.7 525.3 575.2 629.9TaxesPayable 350.0 350.0 383.3 419.7 459.6 503.3 551.2OtherCurrentLiabilities 200.0 200.0 219.0 239.8 262.7 287.6 314.9TotalCurrentLiabilities 2,150.0 2,150.0 2,354.5 2,578.4 2,823.5 3,091.9 3,385.6

RevolverDebt 3,100.0 (3,100.0) 0.0 0.0 0.0 0.0 0.0 0.0OtherLongTermDebt 8,000.0 (8,000.0) 0.0 0.0 0.0 0.0 0.0 0.0NewRevolver 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0BankDebt 0.0 24,300.0 24,300.0 21,947.0 18,732.1 14,522.7 9,324.2 2,823.4SubDebt 0.0 16,200.0 16,200.0 16,200.0 16,200.0 16,200.0 16,200.0 16,200.0PIKSubDebt 0.0 16,200.0 16,200.0 17,820.0 19,602.0 21,562.2 23,718.4 26,090.3OtherLongTermLiabilities 400.0 400.0 400.0 400.0 400.0 400.0 400.0TotalLiabilities 13,650.0 59,250.0 58,721.5 57,512.4 55,508.4 52,734.5 48,899.3

ShareholdersEquity 5,250.0 (5,250.0) 0.0 0.0 0.0 0.0 0.0 0.0SponsorEquity 0.0 35,508.0 35,508.0 36,946.4 39,002.5 41,784.2 45,259.3 49,711.5TotalLiabilities&SE 18,900.0 94,758.0 95,667.9 96,514.9 97,292.5 97,993.8 98,610.9

GoodwillCalculationAssets 18,900.0Liabilities 13,650.0PriorGoodwill 150.0NetTangibleAssets 5,100.0PurchaseEquity 80,000.0NewGoodwill 74,900.0

11 Net working capital WorkingCapital 2015 2016E 2017E 2018E 2019E 2020EDaysAccountsReceivable 51.1 51.1 51.1 51.1 51.1 51.1DaysInventory 81.1 81.1 81.1 81.1 81.1 81.1OtherCurrentAssets%Revenue 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%

DaysAccountsPayable 48.7 48.7 48.7 48.7 48.7 48.7AccruedExpenses%COGS 4.4% 4.4% 4.4% 4.4% 4.4% 4.4%TaxesPayable%COGS 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%OtherCurrentLiabilities%COGS 2.2% 2.2% 2.2% 2.2% 2.2% 2.2%

NWC 2,750.0 3,025.7 3,329.1 3,662.9 4,030.2 4,434.3(Increase)/DecreaseinNWC (275.7) (303.4) (333.8) (367.3) (404.1)

12 Cash flow statement StatementofCashFlows 2015 2016E 2017E 2018E 2019E 2020ENetIncome 1,288.4 1,906.1 2,631.7 3,475.1 4,452.2Plus:D&A 1,112.0 1,222.0 1,343.0 1,476.1 1,622.5Plus:AmortizedFinancingFees 208.3 208.3 208.3 208.3 208.3Plus:PIKInterest 1,620.0 1,782.0 1,960.2 2,156.2 2,371.8Less:IncreaseinNWC (275.7) (303.4) (333.8) (367.3) (404.1)OperatingCashFlows 3,953.0 4,815.0 5,809.4 6,948.5 8,250.8

Capex (1,750.0) (1,750.0) (1,750.0) (1,750.0) (1,750.0)InvestingCashFlows (1,750.0) (1,750.0) (1,750.0) (1,750.0) (1,750.0)

ShareIssuance 150.0 150.0 150.0 0.0 0.0ShareRepurchase 0.0 0.0 0.0 0.0 0.0Dividends 0.0 0.0 0.0 0.0 0.0CashAvailableforDebtPaydown 2,353.0 3,215.0 4,209.4 5,198.5 6,500.8

NewRevolverPaydown 0.0 0.0 0.0 0.0 0.0BankDebtPaydown (2,353.0) (3,215.0) (4,209.4) (5,198.5) (6,500.8)SubDebtPaydown 0.0 0.0 0.0 0.0 0.0PIKSubDebtPaydown 0.0 0.0 0.0 0.0 0.0TotalDebtPaydown (2,353.0) (3,215.0) (4,209.4) (5,198.5) (6,500.8)

BeginningCash 0.0 0.0 0.0 0.0 0.0ChangeinCash 0.0 0.0 0.0 0.0 0.0EndingCash 0.0 0.0 0.0 0.0 0.0 0.0

13 Debt schedule DebtSchedule 2015 2016E 2017E 2018E 2019E 2020EFCFAvailableforDebtPaydown 2,353.0 3,215.0 4,209.4 5,198.5 6,500.8BeginningCash 0.0 0.0 0.0 0.0 0.0MinimumCash 0.0 0.0 0.0 0.0 0.0TotalFCFAvailableforDebtPaydown 2,353.0 3,215.0 4,209.4 5,198.5 6,500.8

Revolver: 9.5%Beginning 0.0 0.0 0.0 0.0 0.0Paydown Yes 0.0 0.0 0.0 0.0 0.0Ending 0.0 0.0 0.0 0.0 0.0 0.0CashInterestExpense 0.0 0.0 0.0 0.0 0.0

BankDebt: 10.0%Beginning 24,300.0 21,947.0 18,732.1 14,522.7 9,324.2Paydown Yes (2,353.0) (3,215.0) (4,209.4) (5,198.5) (6,500.8)Ending 24,300.0 21,947.0 18,732.1 14,522.7 9,324.2 2,823.4CashInterestExpense 2,312.4 2,034.0 1,662.7 1,192.3 607.4

SubDebt: 10.0%Beginning 16,200.0 16,200.0 16,200.0 16,200.0 16,200.0Paydown Yes 0.0 0.0 0.0 0.0 0.0Ending 16,200.0 16,200.0 16,200.0 16,200.0 16,200.0 16,200.0CashInterestExpense 1,620.0 1,620.0 1,620.0 1,620.0 1,620.0

PIKSubDebt: 0.0%Beginning 16,200.0 17,820.0 19,602.0 21,562.2 23,718.4PIKInterest 10.0% 1,620.0 1,782.0 1,960.2 2,156.2 2,371.8Paydown Yes 0.0 0.0 0.0 0.0 0.0Ending 16,200.0 17,820.0 19,602.0 21,562.2 23,718.4 26,090.3CashInterestExpense 0.0 0.0 0.0 0.0 0.0

Cash: 4.5%Beginning 0.0 0.0 0.0 0.0 0.0ChangeinCash No 0.0 0.0 0.0 0.0 0.0Ending 0.0 0.0 0.0 0.0 0.0 0.0CashInterestIncome 0.0 0.0 0.0 0.0 0.0

14 Additional schedules AdditionalSchedules 2015 2016E 2017E 2018E 2019E 2020EShares:Beginning 4,000.0 4,010.0 4,020.0 4,030.0 4,030.0Plus:Issued 10.0 10.0 10.0 0.0 0.0Less:Repurchased 0.0 0.0 0.0 0.0 0.0Ending 4,000.0 4,010.0 4,020.0 4,030.0 4,030.0 4,030.0

SponsorShares 4,000.0 4,000.0 4,000.0 4,000.0 4,000.0 4,000.0Non-SponsorShares 0.0 10.0 20.0 30.0 30.0 30.0SponsorOwnership% 100.0% 99.8% 99.5% 99.3% 99.3% 99.3%

Dividends: 0.0SponsorDividends 0.0 0.0 0.0 0.0 0.0Non-SponsorDividends 0.0 0.0 0.0 0.0 0.0TotalDividends 0.0 0.0 0.0 0.0 0.0

ShareholderEquity:Beginning 35,508.0 36,946.4 39,002.5 41,784.2 45,259.3Plus:NetIncome 1,288.4 1,906.1 2,631.7 3,475.1 4,452.2Plus:Issuance 15.0 150.0 150.0 150.0 0.0 0.0Less:Repurchase 0.0 0.0 0.0 0.0 0.0 0.0Less:Dividends 0.0 0.0 0.0 0.0 0.0Ending 35,508.0 36,946.4 39,002.5 41,784.2 45,259.3 49,711.5

15 LBO returns analysis LBOReturnsAnalysis 2015 2016E 2017E 2018E 2019E 2020EEBITDA 9,020.0 10,043.0 11,180.4 12,444.9 13,850.4ExitMultiple 12.0x 12.0x 12.0x 12.0x 12.0xTEVatExit 108,240.0 120,516.0 134,164.8 149,338.2 166,204.6Less:NetDebt (55,967.0) (54,534.1) (52,284.9) (49,242.6) (45,113.7)EquityValue 52,273.0 65,981.9 81,879.9 100,095.6 121,090.9ManagementOptions 0.0% 0.0 0.0 0.0 0.0 0.0SponsorEquityatExit 52,273.0 65,981.9 81,879.9 100,095.6 121,090.9SponsorEquityatClosing 35,508.0 35,508.0 35,508.0 35,508.0 35,508.0

SponsorInvestment (35,508.0) (35,508.0) (35,508.0) (35,508.0) (35,508.0)2016 52,273.0 0.0 0.0 0.0 0.02017 65,981.9 0.0 0.0 0.02018 81,879.9 0.0 0.02019 100,095.6 0.02020 121,090.9

IRR 47.2% 36.3% 32.1% 29.6% 27.8%MOIC 1.5x 1.9x 2.3x 2.8x 3.4x

16 DCF analysis DiscountedCashFlowsAnalysis 2015 2016E 2017E 2018E 2019E 2020EEBIT 7,908.0 8,821.0 9,837.4 10,968.8 12,227.9

EBITDA 9,020.0 10,043.0 11,180.4 12,444.9 13,850.4Less:Capex (1,750.0) (1,750.0) (1,750.0) (1,750.0) (1,750.0)Less:IncreaseinNWC (275.7) (303.4) (333.8) (367.3) (404.1)Less:Taxes (3,163.2) (3,528.4) (3,935.0) (4,387.5) (4,891.2)UFCF 3,831.1 4,461.2 5,161.6 5,940.1 6,805.1

WACC 12.0%TYMultiple 10.0xTYValue 138,503.9PVofTYValue 78,590.8PVofUFCF 18,287.5TotalEnterpriseValue 96,878.3Less:NetDebt (10,750.0)EquityValue 86,128.3Shares 4,000.0ImpliedPrice/Share 21.5CurrentPrice/Share 15.0ImpliedPremium 43.5%

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