A private equity firm acquires a $200 EBITDA company for an 8x multiple using 50% debt. What is the initial equity investment?

A private equity firm acquires a $200 EBITDA company for an 8x multiple using 50% debt. What is the initial equity investment?

• A. 800
• B. 1600
• C. 400
• D. 1000

Answer: (A)

The question hinges on how enterprise value and leverage determine the upfront equity. Start by converting EBITDA and multiple into enterprise value: 200 x 8 = 1600. If 50% of that is financed with debt, debt equals 0.5 x 1600 = 800. The remaining financing must come from equity, so equity investment = enterprise value minus debt = 1600 − 800 = 800. Therefore, the initial equity investment is 800. This reflects that private equity deals use debt to finance part of the purchase and the rest comes from equity; different leverage levels would change the equity amount accordingly.

The question hinges on how enterprise value and leverage determine the upfront equity. Start by converting EBITDA and multiple into enterprise value: 200 x 8 = 1600. If 50% of that is financed with debt, debt equals 0.5 x 1600 = 800. The remaining financing must come from equity, so equity investment = enterprise value minus debt = 1600 − 800 = 800. Therefore, the initial equity investment is 800. This reflects that private equity deals use debt to finance part of the purchase and the rest comes from equity; different leverage levels would change the equity amount accordingly.