LBO MODEL EXAM QUESTIONS AND ANSWERS
WITH COMPLETE SOLUTIONS GRADED A++
What is an LBO
Acquisition where a significant part of the purchase price is funded with debt and the
remaining portion is funded with equity by a financial sponsors
What are the different kinds of debt you could use in an LBO and the differences
between everything.
Floating interest rates consist of a revolver, term loan A and term loan b, with the
interest rate increasing respectivly across the 3. Tenor ranges from 3-5, 4-6, or 4-8
years. They are senior secured and the investors are suually conservative banks. Then
there is fixed rate debt that includes senior notes, subordinated notes, and mezzanine.
The interest rates are higher than floating, and increase respectively. Senior notes are
7-10 years, and are senior unsecured. subordinated notes are 8-10 years, and are
senior unsubordinated. Mezzanine is the highest interest rate and the lowest seniority, it
can also be PIK.
Seniority
refers tot he order of claims on a company's assets in a bankruptcy
What is the difference between a floating and fixed interest rates
A floating interest rate is tied to LIBOR, meaning that the interest rate of the loan is
whatever LIBOR is at current, plus the amount of basis points. A fixed interest rate,
would be fixed, it doesn't float with LIBOR.
, Describe the different types of amortization
Straight line means the company pays off the principal in equal installments each year,
while bullet means that the entire principal is due at the end of the loan's lifecycle.
Minimal just means a low percentage of principal each year usually in the 1-5% range.
What is call protection
Call protection indicates if the company is prohibited from "calling back" or paying off or
redeeming the security for a certain period
Why is call protection beneficial to investors
Because they are guaranteed a certain number of interest payments
How would an asset write-up or write-down affect an LBO model?
You calculate goodwill, other intangibles, and the rest of the write-ups in the same way,
and then the balance sheet adjustments (subtracting cash, adding in capitalized
financing fees, writing up assets, wiping out goodwill, adjusting the deferred tax
assets/liabilities, adding in new debt). You also assume that the exisiting shareholders'
equity is wiped out and replaced by the equity the private equity firm contributes to buy
the company. And you are not combining the companies' balance sheets
how do we calculated the IRR for the debt investors?
For debt investors, you need to calculate the interest and principal payments they
receive from the company each year. Then you simple use the IRR function in excel
and start with the negative amount of the original debt for Year 0, assume the interest
rate and principal payments each year are your cash flows and then assume that the
remaining debt balance in the final year is your exit value.
Who typically receives a higher IRR, equity or debt investors?
WITH COMPLETE SOLUTIONS GRADED A++
What is an LBO
Acquisition where a significant part of the purchase price is funded with debt and the
remaining portion is funded with equity by a financial sponsors
What are the different kinds of debt you could use in an LBO and the differences
between everything.
Floating interest rates consist of a revolver, term loan A and term loan b, with the
interest rate increasing respectivly across the 3. Tenor ranges from 3-5, 4-6, or 4-8
years. They are senior secured and the investors are suually conservative banks. Then
there is fixed rate debt that includes senior notes, subordinated notes, and mezzanine.
The interest rates are higher than floating, and increase respectively. Senior notes are
7-10 years, and are senior unsecured. subordinated notes are 8-10 years, and are
senior unsubordinated. Mezzanine is the highest interest rate and the lowest seniority, it
can also be PIK.
Seniority
refers tot he order of claims on a company's assets in a bankruptcy
What is the difference between a floating and fixed interest rates
A floating interest rate is tied to LIBOR, meaning that the interest rate of the loan is
whatever LIBOR is at current, plus the amount of basis points. A fixed interest rate,
would be fixed, it doesn't float with LIBOR.
, Describe the different types of amortization
Straight line means the company pays off the principal in equal installments each year,
while bullet means that the entire principal is due at the end of the loan's lifecycle.
Minimal just means a low percentage of principal each year usually in the 1-5% range.
What is call protection
Call protection indicates if the company is prohibited from "calling back" or paying off or
redeeming the security for a certain period
Why is call protection beneficial to investors
Because they are guaranteed a certain number of interest payments
How would an asset write-up or write-down affect an LBO model?
You calculate goodwill, other intangibles, and the rest of the write-ups in the same way,
and then the balance sheet adjustments (subtracting cash, adding in capitalized
financing fees, writing up assets, wiping out goodwill, adjusting the deferred tax
assets/liabilities, adding in new debt). You also assume that the exisiting shareholders'
equity is wiped out and replaced by the equity the private equity firm contributes to buy
the company. And you are not combining the companies' balance sheets
how do we calculated the IRR for the debt investors?
For debt investors, you need to calculate the interest and principal payments they
receive from the company each year. Then you simple use the IRR function in excel
and start with the negative amount of the original debt for Year 0, assume the interest
rate and principal payments each year are your cash flows and then assume that the
remaining debt balance in the final year is your exit value.
Who typically receives a higher IRR, equity or debt investors?
