Leveraged Buyout

Case Study
 The Corporate Finance Institute LBO Case Study – Volta Electronics Co.

Table of Contents

03 Introduction

04 Executive Summary

05 Company Overview
05 - The Company

07 Management’s Discussion & Analysis

07 - Revenue Growth
07 - Costs and Expenses
08 - Non-recurring Expenses
08 - Capital Assets

09 Appendices
09 - Appendix 1: Income Statement
10 - Appendix 2: Balance Sheet
11 - Appendix 3: Cash Flow Statement
12 - Appendix 4: Accessible Debt and Repayment Schedules
13 - Appendix 5: Supplemental Revenue and Income Information

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 The Corporate Finance Institute LBO Case Study – Volta Electronics Co.

Introduction

Letter from the CEO of Dear Students,

the Corporate Finance
Institute
This case study contains information on a private company – Volta Electronics Co.

The purpose of the case is to provide you with a data-set to create your financial
model, value the company, and make an investment recommendation to the partners
at a private equity firm.

In completing this case, you will practice and improve your financial modeling
skills and demonstrate your ability to make sound financial assumptions based on
contextual information and the company’s financial state.

External sources of information may be used to supplement your analysis but is not
required for the completion of this case.

We hope this case provides you with a unique learning experience and helps you
sharpen your financial modeling skills.

Good luck!

Tim Vipond
Chief Executive Officer
Corporate Finance Institute®

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 The Corporate Finance Institute LBO Case Study – Volta Electronics Co.

Executive Summary

Instructions for the You are a financial analyst at the private equity firm, Kronos Capital, which
Case Study invests in high growth companies with an expected internal rate of return (IRR)
of 30% or more. In this case study, you will be evaluating a potential leveraged
buyout (LBO) transaction. Kronos Capital is considering acquiring 100% of a
private company, Volta Electronics Co.

Your task is to create a financial model and determine the value of the company.
You will need to determine the maximum price that Kronos Capital can offer in
this acquisition to satisfy the minimum expected IRR of 30%.

To approach this case, you will need to assess the company’s financial
statements and use information provided by management to come up with a set
of assumptions. You will then need to complete parts of the provided LBO model
and use these assumptions to value the company and identify the maximum
price per share that Kronos Capital should offer.

A set of financial statements are provided in this case. These financial

statements are simplified to allow you to focus on modeling the company. You
will also be given a working LBO model with some supplementary data already
inputted. However, some portions of the model will be empty, requiring you to
complete them.

The date of this transaction for IRR calculation purposes is June 30th, 2018.

Instructions for the Case

1. Download all files for the case (case study, Excel template, and answer key)
2. Read the case study to determine your forecast assumptions and drivers
using the company’s financials and Management’s Discussion and Analysis
3. Build a financial model and determine the intrinsic value of the Company
(complete all yellow-highlighted sections)
4. Determine the maximum price that Kronos Capital can offer to obtain an
internal rate of return (IRR) of at least 30%
5. Evaluate the effects on the IRR under different offer prices and exit multiple
assumptions
6. Compare your completed model to the case solution

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 The Corporate Finance Institute LBO Case Study – Volta Electronics Co.

Company Overview

Volta Electronics Co.

The Company
Volta Electronics Co. (referred to as “Volta”, “the Company”, or “Volta Electronics”)
is a global consumer electronics manufacturer. Volta produces a wide range of
electronics products such as speakers, computer peripherals, tablet devices,
and televisions. Their brand is associated with high-performing, energy efficient
products that are stylish and modern.

Volta is a well diversified company with several product lines that target multiple
consumer segments. The company’s products also exist within several price
ranges, allowing them to maximize their reach.

Volta’s largest segment consists of their household electronics segment. The

company produces a variety of items at different price points, such as surround
sound speaker systems, refrigerators, televisions, and home theater systems.
The household electronics segment is their primary driver of revenues. Volta’s
household electronics products are focused around being energy efficient,
modern, and chic.

Volta seeks to stand out by developing top-of-the-line quality products that are
distinguished from their competitors. Volta’s products are Energy Star certified.
The Company also actively aims to attain certifications for their product lines
whenever relevant, such as the THX certification for their home audio products.

Additionally, Volta has been making investments towards higher margin revenue
streams. While the Company has already produced computer accessories,
such as keyboards, mice, and computer speakers – computer peripherals,
Volta is now exploring products targeting the gaming industry. Volta has
already established an infrastructure producing computer peripherals. By now
transitioning into the gaming peripherals market, Volta will be able to minimize
capital investment costs due to their established infrastructure, while still
tapping into a higher margin revenue stream.

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Volta Electronics Co.
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The Corporate Finance Institute LBO Case Study – Volta Electronics Co.
The gaming peripherals market is comparatively more open to premium
computer peripheral products. This allows manufacturers to charge a higher
markup on their products. Volta is aiming to capture a significant portion of
this market by partnering with influencers, esports organizations, and game
production studios. As Volta’s brand is defined by their high performance and
their modern designs, a gaming focused product line will not be a departure
from Volta’s brand offering.
Volta’s products have a global reach. Volta has relationships with distributors,
wholesalers, and retailers in North America, Western Europe, and Asia. The
Company’s products can be easily identified and found in department stores,
appliance stores, electronics shops, and other similar stores. Volta also sells
directly to consumers through ecommerce channels on their website.
06

Management’s analysis
of the company’s future
prospects and financial
performance.
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The Corporate Finance Institute LBO Case Study – Volta Electronics Co.
Management’s Discussion
& Analysis
Revenue Growth
With continuous expansion in our markets and product lines, as well as our
entry into the gaming peripherals market, we expect our revenue to increasingly
grow throughout the years. We expect the revenue growth rate to continue to
accelerate equal to the average percentage change of revenue growth rates
from 2014 to 2017.
Costs and Expenses
We are able to keep our costs low by utilizing economies of scale and existing
infrastructure to target the new gaming peripherals market. Volta is well-
established, with manufacturing centers around the world. Due to the high
volume of our operations, we are able to attain operating leverage. Additionally,
while gaming peripheral products are a new product line, we can easily convert
our existing machinery to produce these new products.
We expect cost of goods sold to continue to decrease for the rest of 2018 by the
historical average change in cost of goods sold as a percentage of revenue from
2014 to 2017 before adjustments. By taking the pre-adjustment average, we
believe this will account for any potential future non-recurring expenses. After
this, we predict that cost of goods sold will remain as a constant proportion of
revenue.
Marketing and advertising costs will follow revenue closely. Spending on
marketing is directly proportional to sales and this will not change in the future.
General and administrative expenses are fixed costs. However, we predict
that these costs will increase by approximately 9% in 2022 and will remain at
this level going forward. This is to reflect the growth of the Company and the
associated costs needed to manage the Company.
07

Management’s analysis
of the company’s future
prospects and financial
performance.
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The Corporate Finance Institute LBO Case Study – Volta Electronics Co.
Non-recurring Expenses
Supply chain issues caused our Company to seek additional suppliers for raw
materials at a slightly increased cost. This resulted in an additional expense of
$725,000. We have since solved these issues and we expect our raw materials
costs to return to normal for 2018.
Capital Assets
Due to streamlining efforts and technological advancements resulting
in increased production efficiency, we will be able to reduce our capital
expenditures in 2018 by half of the historical proportional amount.
Thereafter, we foresee that capital expenditures will return to their historical
levels as a proportion of the sales generated by the Company. We are able
to maintain this proportion as our infrastructure is easily converatble to
accommodate new product lines.
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 The Corporate Finance Institute LBO Case Study – Volta Electronics Co.

Appendices

Appendix 1: Income Statement

For years ended Dec. 31

(USD ‘000s) 2014 2015 2016 2017

Revenue 88,306 92,986 98,007 103,496

Cost of Goods Sold (COGS) 49,098 51,421 53,708 56,302
Gross Profit 39,208 41,565 44,299 47,194

Marketing, Advertising & Promotion 11,127 11,530 11,859 12,419

General & Administrative 4,500 5,000 5,500 5,500
EBITDA 23,581 25,034 26,940 29,275

Depreciation & Amortization 5,307 5,379 5,412 5,489

EBIT 18,274 19,656 21,529 23,785

Interest 431 377 323 269

Current Taxes 5,353 5,784 6,362 7,055
Net Earnings 12,490 13,495 14,844 16,461

Supplemental information to complete the case.

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 The Corporate Finance Institute LBO Case Study – Volta Electronics Co.

Appendix 2: Balance Sheet

For years ended Dec. 31

(USD ‘000s) 2014 2015 2016 2017

Assets
Cash 37,309 49,219 62,196 76,504
Accounts Receivable 3,871 4,076 4,296 4,537
Inventory 7,129 7,467 7,799 8,175
Current Assets 48,309 60,761 74,291 89,216
Property & Equipment 32,598 32,799 33,267 33,988
Goodwill - - - -
Total Assets 80,908 93,560 107,558 123,204

Liabilities
Short Term Debt - - - -
Accounts Payable 4,977 5,213 5,444 5,707
Current Liabilities 4,977 5,213 5,444 5,707
Long Term Debt 8,622 7,544 6,467 5,389
Total Liabilities 13,599 12,757 11,911 11,096
Shareholder’s Equity
Equity Capital 46,453 46,453 46,453 46,453
Retained Earnings 20,855 34,350 49,194 65,655
Shareholder’s Equity 67,308 80,803 95,647 112,108
Total Liabilities & Shareholder’s Equity 80,908 93,560 107,558 123,204

Supplemental information to complete the case.

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 The Corporate Finance Institute LBO Case Study – Volta Electronics Co.

Appendix 3: Cash Flow Statement

For years ended Dec. 31

(USD ‘000s) 2014 2015 2016 2017

Operating Cash Flow

Net Earnings 12,490 13,495 14,844 16,461
Plus: Depreciation & Amortization 5,307 5,379 5,412 5,489
Less: Increase in Working Capital 294 307 320 354
Cash from Operations 17,503 18,567 19,935 21,596

Investing Cash Flow

Investments in Property & Equipment (5,740) (5,579) (5,880) (6,210)
Investments in Businesses
Cash from Investing (5,740) (5,579) (5,880) (6,210)

Financing Cash Flow

Issuance of Debt (Line of Credit) - - - -
Repayment of Debt - (1,078) (1,078) (1,078)
Issuance of Equity - - - -
Repurchase of Equity - - - -
Payment of Dividends - - - -
Cash from Financing - (1,078) (1,078) (1,078)

Net Increase (Decrease) in Cash 11,764 11,910 12,977 14,309

Opening Cash Balance 25,545 37,309 49,219 62,196
Closing Cash Balance 37,309 49,219 62,196 76,504

Supplemental information to complete the case.

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 The Corporate Finance Institute LBO Case Study – Volta Electronics Co.

Appendix 4: Accessible Debt and Repayment Schedules

Mandatory Principal Repayment (Loan Amortization)

Type Financing Fee Coupon Sweep Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Line of Credit 1.5% 3.0% N/A 0% 0% 0% 0% 0% 0% 0%
Term Loan 1 1.5% 5.5% 50% 10% 10% 10% 10% 60% 0% 0%
Term Loan 2 1.5% 8.0% 50% 10% 10% 10% 10% 10% 50% 0%
Sub Debt 1 1.5% 9.0% 0% 0% 0% 0% 0% 0% 0% 100%

Term loan 1 and term loan 2 share the same level of debt seniority. Excess cash used to repay debt must be applied
to both term loan 1 and term loan 2 equally.

The maximum amount of total debt that can be approved is up to 4.0x EBITDA.

The maximum amount for each type of debt that can be approved is as follows:

Type Amount
Line of Credit Up to 0.40x EBITDA

Term Loan 1 Up to 1.70x EBITDA

Term Loan 2 Up to 1.30x EBITDA

Sub Debt 1 Up to 1.00x EBITDA

Supplemental information to complete the case.

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Appendix 5: Supplemental Revenue and Income

Information

Supplemental information to complete the case.

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