LBO MODELS EXAM QUESTIONS AND ANSWERS WITH
COMPLETE SOLUTIONS VERIFIED GRADED A++
2024/2025
What variables impact an LBO model the most?
Purchase and exit multiples have the biggest impact on the returns of a model. After
that, the amount of leverage (debt) used also has a significant impact, followed by
operational characteristics such as revenue growth and EBITDA margins.
How do you pick purchase multiples and exit multiples in an LBO model?
you look at what comparable companies are trading at, and what multiples similar LBO
transactions have had. As always, you also show a range of purchase and exit multiples
using sensitivity tables.
Sometimes you set purchase and exit multiples based on a specific IRR target that
you're trying to achieve - but this is just for valuation purposes if you're using an LBO
model to value the company.
What is an "ideal" candidate for an LBO?
. stable and predictable cash flows (most important)
. low-risk business
. not much need for ongoing investments such as Capital Expenditures
. an opportunity for expense reductions to boost their margins
, A strong management team also helps, as does a base of assets to use as collateral for
debt.
How do you use an LBO model to value a company, and why do we sometimes
say that it sets the "floor valuation" for the company?
You use it to value a company by setting a targeted IRR (for example, 25%) and then
back-solving in Excel to determine what purchase price the PE firm could pay to
achieve that IRR.
This is sometimes called a "floor valuation" because PE firms almost always pay less
for a company than strategic acquirers would.
Give an analogy of a real life LBO
The most common example is taking out a mortgage when you buy a house. Here's
how the analogy works:
• Down Payment: Investor Equity in an LBO
• Mortgage: Debt in an LBO
• Mortgage Interest Payments: Debt Interest in an LBO
• Mortgage Repayments: Debt Principal Repayments in an LBO
• Selling the House: Selling the Company / Taking It Public in an LBO
Why are Goodwill & Other Intangibles created in an LBO?
COMPLETE SOLUTIONS VERIFIED GRADED A++
2024/2025
What variables impact an LBO model the most?
Purchase and exit multiples have the biggest impact on the returns of a model. After
that, the amount of leverage (debt) used also has a significant impact, followed by
operational characteristics such as revenue growth and EBITDA margins.
How do you pick purchase multiples and exit multiples in an LBO model?
you look at what comparable companies are trading at, and what multiples similar LBO
transactions have had. As always, you also show a range of purchase and exit multiples
using sensitivity tables.
Sometimes you set purchase and exit multiples based on a specific IRR target that
you're trying to achieve - but this is just for valuation purposes if you're using an LBO
model to value the company.
What is an "ideal" candidate for an LBO?
. stable and predictable cash flows (most important)
. low-risk business
. not much need for ongoing investments such as Capital Expenditures
. an opportunity for expense reductions to boost their margins
, A strong management team also helps, as does a base of assets to use as collateral for
debt.
How do you use an LBO model to value a company, and why do we sometimes
say that it sets the "floor valuation" for the company?
You use it to value a company by setting a targeted IRR (for example, 25%) and then
back-solving in Excel to determine what purchase price the PE firm could pay to
achieve that IRR.
This is sometimes called a "floor valuation" because PE firms almost always pay less
for a company than strategic acquirers would.
Give an analogy of a real life LBO
The most common example is taking out a mortgage when you buy a house. Here's
how the analogy works:
• Down Payment: Investor Equity in an LBO
• Mortgage: Debt in an LBO
• Mortgage Interest Payments: Debt Interest in an LBO
• Mortgage Repayments: Debt Principal Repayments in an LBO
• Selling the House: Selling the Company / Taking It Public in an LBO
Why are Goodwill & Other Intangibles created in an LBO?
