In the example, EBITDA grows to $240 in three years and the debt is paid down; the company goes public with equity sold evenly over three years at a 10x exit multiple. What is the approximate IRR?

In the example, EBITDA grows to $240 in three years and the debt is paid down; the company goes public with equity sold evenly over three years at a 10x exit multiple. What is the approximate IRR?

• A. 25%
• B. 35%
• C. 45%
• D. 55%

Answer: (B)

IRR measures the rate of return that makes the upfront equity investment worthwhile given the cash you receive along the way. Here, the exit value is driven by the EBITDA at year three times the exit multiple, and the equity you realize comes from selling that stake in three equal parts. First, the enterprise value at exit is EBITDA times the multiple: 240 times 10 equals 2,400. If debt is paid down by that time, the amount available to equity holders is the equity value at exit; for simplicity, assume net debt is zero, so the equity value is 2,400. Selling equity evenly over three years means you receive 2,400 divided by 3, which is 800 each year. If the initial equity investment is X, the IRR is the rate r that solves: −X + 800/(1+r) + 800/(1+r)^2 + 800/(1+r)^3 = 0. Plugging r = 35% gives a present value of the three 800 cash inflows of about 1,357, so the initial investment is approximately 1,357. That aligns with an IRR near 35% for this setup. Therefore, the approximate IRR is about 35%.

IRR measures the rate of return that makes the upfront equity investment worthwhile given the cash you receive along the way. Here, the exit value is driven by the EBITDA at year three times the exit multiple, and the equity you realize comes from selling that stake in three equal parts.

First, the enterprise value at exit is EBITDA times the multiple: 240 times 10 equals 2,400. If debt is paid down by that time, the amount available to equity holders is the equity value at exit; for simplicity, assume net debt is zero, so the equity value is 2,400. Selling equity evenly over three years means you receive 2,400 divided by 3, which is 800 each year.

If the initial equity investment is X, the IRR is the rate r that solves:

−X + 800/(1+r) + 800/(1+r)^2 + 800/(1+r)^3 = 0.

Plugging r = 35% gives a present value of the three 800 cash inflows of about 1,357, so the initial investment is approximately 1,357. That aligns with an IRR near 35% for this setup. Therefore, the approximate IRR is about 35%.