BIWS LBO AND LBO MODEL GUIDE EXAM QUESTIONS
AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED
GRADED A++
Why do we acquire other companies
company acquiring believes it will be better of afterward
-sellers "asking price:-> lss than the PV of its FCF-> or buyer might expect to realise an
IRR on the deal exceeding WACC
-less than PV of Future FCF or ROIC>WACC
WHy do PE firms acquire companies?
difference between PE firm acquisiton and another firm acquistion
PE never plans to hold on forever
Real estate metaphor for LBOS'
WHat is important for PE firms vs normal firms
Company value when acquiring is all and the potential benefits via synergies (think
diamondback energies acquiring endavour energy)
-they want to understand the IRR and the firm aims for at least 20% iRR-> then the
deal works. and compares that against the fund expectations of the firm.
, What is used to fund LBO's by PE firms
only cash and debt is used not stock like many other acquisitions (think of exxon)
Two benefits of borrowing money from others and using debt to fund the deal
Why does debt amplify returns even though it has to be paid down in LBO?
because money today is worth more than money tommorow-> (TVM)-> since we can
use money to invest it into the future.
Example of how to go about calculating the impact of debt vs only cash when
doing a transaction:
Consider this scenario where an investor buys a house for $500K, rents it out to
earn $35K in
rental income per year, and then sells it for $550K after 5 years have passed:
-notice how the IRR and the MoM jump from 1.5 to 1.9x since the initial capital invested
by the firm is much less than in the first example
Part 2 of the previous example
-notice how despite the lower cash flows and the rrepayment of the debt-> the IRR as a
percentage is still higher (due to the lower purchase price of the companyy)
-this is the intrinsic theory of leverage not boosting but amplifying a companies
returns.
-deals can do better on one end but do worse on the other.
example of how leverage only worsens the plight of companies-> when there is a
downturn or structural issue with the deal.
Owenership strucuture of a PE Firm:
AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED
GRADED A++
Why do we acquire other companies
company acquiring believes it will be better of afterward
-sellers "asking price:-> lss than the PV of its FCF-> or buyer might expect to realise an
IRR on the deal exceeding WACC
-less than PV of Future FCF or ROIC>WACC
WHy do PE firms acquire companies?
difference between PE firm acquisiton and another firm acquistion
PE never plans to hold on forever
Real estate metaphor for LBOS'
WHat is important for PE firms vs normal firms
Company value when acquiring is all and the potential benefits via synergies (think
diamondback energies acquiring endavour energy)
-they want to understand the IRR and the firm aims for at least 20% iRR-> then the
deal works. and compares that against the fund expectations of the firm.
, What is used to fund LBO's by PE firms
only cash and debt is used not stock like many other acquisitions (think of exxon)
Two benefits of borrowing money from others and using debt to fund the deal
Why does debt amplify returns even though it has to be paid down in LBO?
because money today is worth more than money tommorow-> (TVM)-> since we can
use money to invest it into the future.
Example of how to go about calculating the impact of debt vs only cash when
doing a transaction:
Consider this scenario where an investor buys a house for $500K, rents it out to
earn $35K in
rental income per year, and then sells it for $550K after 5 years have passed:
-notice how the IRR and the MoM jump from 1.5 to 1.9x since the initial capital invested
by the firm is much less than in the first example
Part 2 of the previous example
-notice how despite the lower cash flows and the rrepayment of the debt-> the IRR as a
percentage is still higher (due to the lower purchase price of the companyy)
-this is the intrinsic theory of leverage not boosting but amplifying a companies
returns.
-deals can do better on one end but do worse on the other.
example of how leverage only worsens the plight of companies-> when there is a
downturn or structural issue with the deal.
Owenership strucuture of a PE Firm:
