Melissa Bockhold Heather Coddington - Franklin College

Lake and other potential investors should jump on this price because it is less than one
third of what Seagate’s projected sales will be in 2000.
Using the capital structure suggested in section VIII-A, the purchase price of $2
billion dollars would be divided among participants as follows:
Participant $$$ Provided
Silver Lake & Partners (40%) $800,000,000
Seagate Management (5%) $100,000,000
Senior Debt (50%) $1,000,0000,000
Subordinate Debt (5%) $100,000,000
With Silver Lake and their partners providing $800 million in equity for the
buyout, we have calculated the net present value of their investment under time frames of
three, four, and five years. We chose these project term lengths because a typical LBO
lasts three to five years. The discount rate used for the investment was found using the
Capital Asset Pricing Model (CAPM). We used the three-month T-Bill rate as our risk-
free rate of return. This rate as of March 2000 was 5.88%. We assumed the market risk
premium to be approximately 9% based on an average of the past 75 years (Corrado 191).
The company’s beta is 1.2 (Andrade 13). Using these figures, we found the discount rate
for the company to be 16.68%.
R
R
R
E
E
E
= 0.
0588 +
= 0.
0588 +
= 0.
1668
1.
2*
0.
09
0.
108
40