Page | 1
M&I GUIDES (TECHNICALS) 2026
LATEST QUESTIONS AND
ANSWERS| ACE YOUR GRADES.
Why are Goodwill & Intangibles created in an LBO? - correct
answer -Remember, these both represent the premium paid to
the "fair market value" of the company. In an LBO, they act as a
"plug" and ensure that the changes to the Liabilities & Equity side
are balanced by changes to the Assets side.
We saw that a strategic acquirer will usually prefer to pay for
another company in cash - if that's the case, why would a PE firm
want to use debt in an LBO? - correct answer -It's a different
scenario because:
1. The PE firm does not intend to hold the company for the long-
term - it usually sells it after a few years, so it is less concerned
with the "expense" of cash vs. debt and more concerned about
using leverage to boost its returns by reducing the amount of
capital it has to contribute upfront.
2. In an LBO, the debt is "owned" by the company, so they
assume much of the risk. Whereas in a strategic acquisition, the
buyer "owns" the debt so it is more risky for them.
, Page | 2
**Do you need to project all 3 statements in an LBO model? Are
there any "shortcuts?" - correct answer -Yes, there are shortcuts
and you don't necessarily need to project all 3 statements.
For example, you do not need to create a full Balance Sheet -
bankers sometimes skip this if they are in a rush.
You do need some form of Income Statement, something to track
how the Debt balances change and some type of Cash Flow
Statement to show how much cash is available to repay debt.
But a full-blown Balance Sheet is not strictly required, because
you can just make assumptions on the Net Change in Working
Capital rather than looking at each item individually.
How would you determine how much debt can be raised in an
LBO and how many tranches there would be? - correct answer -
Usually you would look at Comparable LBOs and see the terms of
the debt and how many tranches each of them used. You would
look at companies in a similar size range and industry and use
those criteria to determine the debt your company can raise.
**what else can influence this?
What is the difference between bank debt and high-yield debt? -
correct answer -This is a simplification, but broadly speaking
, Page | 3
there are 2 "types" of debt: "bank debt" and "high-yield debt."
There are many differences, but here are a few of the most
important ones:
• High-yield debt tends to have higher interest rates than bank
debt (hence the name "high-yield").
• High-yield debt interest rates are usually fixed, whereas bank
debt interest rates are "floating" - they change based on LIBOR or
the Fed interest rate.
• High-yield debt has incurrence covenants while bank debt has
maintenance covenants. The main difference is that incurrence
covenants prevent you from doing something (such as selling an
asset, buying a factory, etc.) while maintenance covenants
require you to maintain a minimum financial performance (for
example, the Debt/EBITDA ratio must be below 5x at all times).
• Bank debt is usually amortized - the principal must be paid off
over time - whereas with high-yield debt, the entire principal is
due at the end (bullet maturity).
Usually in a sizable Leveraged Buyout, the PE firm uses both
types of debt.
Again, there are many different types of debt - this is a
simplification, but you won't need to know more than this for
interviews.
Why might you use bank debt rather than high-yield debt in an
LBO? - correct answer -If the PE firm or the company is
concerned about meeting interest payments and wants a lower-
cost option, they might use bank debt; they might also use bank
, Page | 4
debt if they are planning on major expansion or Capital
Expenditures and don't want to be restricted by incurrence
covenants.
Why would a PE firm prefer high-yield debt instead? - correct
answer -If the PE firm intends to refinance the company at some
point or they don't believe their returns are too sensitive to interest
payments, they might use high-yield debt. They might also use
the high-yield option if they don't have plans for major expansion
or selling off the company's assets.
Why would a private equity firm buy a company in a "risky"
industry, such as technology? - correct answer -Although
technology is more "risky" than other markets, remember that
there are mature, cash flow-stable companies in almost every
industry. There are some PE firms that specialize in very specific
goals, such as:
• Industry consolidation - buying competitors in a similar market
and combining them to increase efficiency and win more
customers.
• Turnarounds - taking struggling companies and making them
function properly again.
• Divestitures - selling off divisions of a company or taking a
division and turning it into a strong stand-alone entity.
So even if a company isn't doing well or seems risky, the firm
might buy it if it falls into one of these categories.
M&I GUIDES (TECHNICALS) 2026
LATEST QUESTIONS AND
ANSWERS| ACE YOUR GRADES.
Why are Goodwill & Intangibles created in an LBO? - correct
answer -Remember, these both represent the premium paid to
the "fair market value" of the company. In an LBO, they act as a
"plug" and ensure that the changes to the Liabilities & Equity side
are balanced by changes to the Assets side.
We saw that a strategic acquirer will usually prefer to pay for
another company in cash - if that's the case, why would a PE firm
want to use debt in an LBO? - correct answer -It's a different
scenario because:
1. The PE firm does not intend to hold the company for the long-
term - it usually sells it after a few years, so it is less concerned
with the "expense" of cash vs. debt and more concerned about
using leverage to boost its returns by reducing the amount of
capital it has to contribute upfront.
2. In an LBO, the debt is "owned" by the company, so they
assume much of the risk. Whereas in a strategic acquisition, the
buyer "owns" the debt so it is more risky for them.
, Page | 2
**Do you need to project all 3 statements in an LBO model? Are
there any "shortcuts?" - correct answer -Yes, there are shortcuts
and you don't necessarily need to project all 3 statements.
For example, you do not need to create a full Balance Sheet -
bankers sometimes skip this if they are in a rush.
You do need some form of Income Statement, something to track
how the Debt balances change and some type of Cash Flow
Statement to show how much cash is available to repay debt.
But a full-blown Balance Sheet is not strictly required, because
you can just make assumptions on the Net Change in Working
Capital rather than looking at each item individually.
How would you determine how much debt can be raised in an
LBO and how many tranches there would be? - correct answer -
Usually you would look at Comparable LBOs and see the terms of
the debt and how many tranches each of them used. You would
look at companies in a similar size range and industry and use
those criteria to determine the debt your company can raise.
**what else can influence this?
What is the difference between bank debt and high-yield debt? -
correct answer -This is a simplification, but broadly speaking
, Page | 3
there are 2 "types" of debt: "bank debt" and "high-yield debt."
There are many differences, but here are a few of the most
important ones:
• High-yield debt tends to have higher interest rates than bank
debt (hence the name "high-yield").
• High-yield debt interest rates are usually fixed, whereas bank
debt interest rates are "floating" - they change based on LIBOR or
the Fed interest rate.
• High-yield debt has incurrence covenants while bank debt has
maintenance covenants. The main difference is that incurrence
covenants prevent you from doing something (such as selling an
asset, buying a factory, etc.) while maintenance covenants
require you to maintain a minimum financial performance (for
example, the Debt/EBITDA ratio must be below 5x at all times).
• Bank debt is usually amortized - the principal must be paid off
over time - whereas with high-yield debt, the entire principal is
due at the end (bullet maturity).
Usually in a sizable Leveraged Buyout, the PE firm uses both
types of debt.
Again, there are many different types of debt - this is a
simplification, but you won't need to know more than this for
interviews.
Why might you use bank debt rather than high-yield debt in an
LBO? - correct answer -If the PE firm or the company is
concerned about meeting interest payments and wants a lower-
cost option, they might use bank debt; they might also use bank
, Page | 4
debt if they are planning on major expansion or Capital
Expenditures and don't want to be restricted by incurrence
covenants.
Why would a PE firm prefer high-yield debt instead? - correct
answer -If the PE firm intends to refinance the company at some
point or they don't believe their returns are too sensitive to interest
payments, they might use high-yield debt. They might also use
the high-yield option if they don't have plans for major expansion
or selling off the company's assets.
Why would a private equity firm buy a company in a "risky"
industry, such as technology? - correct answer -Although
technology is more "risky" than other markets, remember that
there are mature, cash flow-stable companies in almost every
industry. There are some PE firms that specialize in very specific
goals, such as:
• Industry consolidation - buying competitors in a similar market
and combining them to increase efficiency and win more
customers.
• Turnarounds - taking struggling companies and making them
function properly again.
• Divestitures - selling off divisions of a company or taking a
division and turning it into a strong stand-alone entity.
So even if a company isn't doing well or seems risky, the firm
might buy it if it falls into one of these categories.
