LBO MODELING EXAM (WALL STREET PREP)
PRACTICE EXAM QUESTIONS WITH CORRECT
ANSWERS 2026/2027 LATEST
Why do you focus on Equity value in an LBO? -
✔✔✔ANSWER-You need to acquire all the outstanding shares
of a public company
What is Bank Debt vs. High-Yield Debt? - ✔✔✔ANSWER--
Bank debt (Revolver, Term Loan A/B): Lower, floating interest
rates, annual principal repayments, *maintenance* covenants
(i.e. Total Debt/EBITDA must be below 4x), secured
(collatoralized), allows prepayment
High yield debt (Senior/Subordinate notes, Mezzanine): Higher,
fixed interest rates, no annual repayments, *incurrence*
covenants (i.e. the company can't acquire another and sell off
assets), not secured, doesn't allow prepayment
Page | 1
,Why might a PE firm prefer High-Yield Debt? -
✔✔✔ANSWER--Don't want the risk of *floating* rates -Intend
to *refinance* the debt
-Aren't planning big expansions
-Don't believe their returns are sensitive to interest payments
How to assess the amount of debt to use: - ✔✔✔ANSWER-You
can look at recent, similar LBOs and assess the terms, or you can
look at your company's Leverage Ratio or Interest Coverage
ratio, to see how much debt it can afford to take on.
Leverage Ratio = - ✔✔✔ANSWER-Debt / EBITDA
Interest coverage ratio - ✔✔✔ANSWER-EBITDA / Interest
Expense
What are reasonable Leverage and Coverage Ratios? -
✔✔✔ANSWER-Debt/EBITDA should rarely exceed 10x.
Page | 2
, For Interest Coverage, you want a number where the company
can pay for its interest without trouble, but also not high enough
where it can't afford more debt.
Why is it better to reduce the amount of cash PE firms pay up
front?
- ✔✔✔ANSWER-The returns go up because reducing the amount
of cash you pay up-front for an asset has a disproportionate effect
on your returns... since money today is worth more than money
tomorrow.
What do LBO FCF's tell us? - ✔✔✔ANSWER-Tells you how
much cash is available to repay *debt principal* each year
after already paying for normal expenses and debt interest
Can a PE firm earn a solid return if it buys a company for $1
billion and sells it for $1 billion 5 years? - ✔✔✔ANSWER-
Page | 3
PRACTICE EXAM QUESTIONS WITH CORRECT
ANSWERS 2026/2027 LATEST
Why do you focus on Equity value in an LBO? -
✔✔✔ANSWER-You need to acquire all the outstanding shares
of a public company
What is Bank Debt vs. High-Yield Debt? - ✔✔✔ANSWER--
Bank debt (Revolver, Term Loan A/B): Lower, floating interest
rates, annual principal repayments, *maintenance* covenants
(i.e. Total Debt/EBITDA must be below 4x), secured
(collatoralized), allows prepayment
High yield debt (Senior/Subordinate notes, Mezzanine): Higher,
fixed interest rates, no annual repayments, *incurrence*
covenants (i.e. the company can't acquire another and sell off
assets), not secured, doesn't allow prepayment
Page | 1
,Why might a PE firm prefer High-Yield Debt? -
✔✔✔ANSWER--Don't want the risk of *floating* rates -Intend
to *refinance* the debt
-Aren't planning big expansions
-Don't believe their returns are sensitive to interest payments
How to assess the amount of debt to use: - ✔✔✔ANSWER-You
can look at recent, similar LBOs and assess the terms, or you can
look at your company's Leverage Ratio or Interest Coverage
ratio, to see how much debt it can afford to take on.
Leverage Ratio = - ✔✔✔ANSWER-Debt / EBITDA
Interest coverage ratio - ✔✔✔ANSWER-EBITDA / Interest
Expense
What are reasonable Leverage and Coverage Ratios? -
✔✔✔ANSWER-Debt/EBITDA should rarely exceed 10x.
Page | 2
, For Interest Coverage, you want a number where the company
can pay for its interest without trouble, but also not high enough
where it can't afford more debt.
Why is it better to reduce the amount of cash PE firms pay up
front?
- ✔✔✔ANSWER-The returns go up because reducing the amount
of cash you pay up-front for an asset has a disproportionate effect
on your returns... since money today is worth more than money
tomorrow.
What do LBO FCF's tell us? - ✔✔✔ANSWER-Tells you how
much cash is available to repay *debt principal* each year
after already paying for normal expenses and debt interest
Can a PE firm earn a solid return if it buys a company for $1
billion and sells it for $1 billion 5 years? - ✔✔✔ANSWER-
Page | 3
