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LBO MODEL EXAM WALL STREET PREP EXAM
ALL QUESTIONS AND CORRECT ANSWERS||
LATEST AND COMPLETE VERSION 2024 WITH
VERIFIED SOLUTIONS|| ASSURED PASS!!!
How is the process of adjusting the Balance Sheet different in an LBO model,
compared to what you might see in a typical merger model?
a. In an LBO model, the Shareholders' Equity gets wiped out and replaced with
new equity from the PE firm, but in a merger model the seller's Shareholders'
Equity disappears altogether
b. You'll typically add more tranches of Debt to the Balance Sheet in an LBO
model than you will in a merger model
c. In an LBO model, you combine two companies' Balance Sheets to reflect the
PE firm and the acquired company, but in a merger model you must make
adjustments first
d. None of the above - ANSWER Explanation: A is definitely true and
is exactly as stated:
Shareholders' Equity gets wiped out in both deal types, but in a merger model it
stays wiped out since the seller is no longer an independent entity, but in an LBO
model it gets replaced with the PE firm's new equity (common equity, Preferred
Stock, and anything else that goes in that section). B is also true because while debt
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is often used in a merger model (and M&A deals in general), there are typically
more tranches of debt in a leveraged buyout. C is incorrect because you never
combine the PE firm's own "Balance Sheet" with the target company it acquires.
You "make adjustments" in both types of models, but the difference is that in an
LBO model, you don't combine the Balance Sheets of two companies because it's a
single company being bought out.
Which of the following statements are TRUE regarding why Capitalized Financing
Fees are considered an Asset?
a. They are similar to Prepaid Expenses
b. Because they are paid for in cash up-front and then recognized as an Income
Statement expense over the years
c. They are an Asset because, similar to other non-cash charges, they may save
the company on taxes
d. They are a "plug" in an LBO model to make the Balance Sheet balance -
ANSWER Explanation: The correct answer choices are A, B, and C.
Capitalized Financing Fees are similar to Prepaid Expenses and also similar to how
PP&E is treated on the Balance Sheet. The expense is paid up-front in cash and
then 'capitalized' on the Balance Sheet as an Asset. Then each period the expense is
recognized on the Income Statement, similar to how PP&E is depreciated over
time. The other reason they are considered an Asset is because all Assets provide
future benefits or cash savings. In this case, the annual expense associated with this
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Asset flows through to the Income Statement and reduces the amount of taxable
income, but is not an actual cash expense itself - so it saves the company on taxes,
similar to Depreciation. Answer choice D is false in that the true "plug" to make
the Balance Sheet balance is Goodwill created, not the Capitalized Financing Fees.
Which of the following statements are TRUE regarding the use of the Revolver
and when you draw on it?
a. The Revolver is drawn when the cash required for Mandatory Debt
Repayment exceeds the cash flows available for debt repayment (i.e. FCF in an
LBO model)
b. The Revolver starts off undrawn - similar to a personal credit card with a
fixed
credit line
c. A drawn Revolver is the first debt tranche to be repaid with excess cash in
subsequent periods before any repayment of Term Loans
d. Revolvers are the first debt tranche to be repaid with excess cash because
they are the most expensive form of LBO financing - ANSWER Explanation:
The correct answer choices are A, B, and C. All of the above statements with the
exception of D are true statements. The purpose of the Revolver is to draw it down
LBO MODEL EXAM WALL STREET PREP EXAM
ALL QUESTIONS AND CORRECT ANSWERS||
LATEST AND COMPLETE VERSION 2024 WITH
VERIFIED SOLUTIONS|| ASSURED PASS!!!
How is the process of adjusting the Balance Sheet different in an LBO model,
compared to what you might see in a typical merger model?
a. In an LBO model, the Shareholders' Equity gets wiped out and replaced with
new equity from the PE firm, but in a merger model the seller's Shareholders'
Equity disappears altogether
b. You'll typically add more tranches of Debt to the Balance Sheet in an LBO
model than you will in a merger model
c. In an LBO model, you combine two companies' Balance Sheets to reflect the
PE firm and the acquired company, but in a merger model you must make
adjustments first
d. None of the above - ANSWER Explanation: A is definitely true and
is exactly as stated:
Shareholders' Equity gets wiped out in both deal types, but in a merger model it
stays wiped out since the seller is no longer an independent entity, but in an LBO
model it gets replaced with the PE firm's new equity (common equity, Preferred
Stock, and anything else that goes in that section). B is also true because while debt
,2|Page
is often used in a merger model (and M&A deals in general), there are typically
more tranches of debt in a leveraged buyout. C is incorrect because you never
combine the PE firm's own "Balance Sheet" with the target company it acquires.
You "make adjustments" in both types of models, but the difference is that in an
LBO model, you don't combine the Balance Sheets of two companies because it's a
single company being bought out.
Which of the following statements are TRUE regarding why Capitalized Financing
Fees are considered an Asset?
a. They are similar to Prepaid Expenses
b. Because they are paid for in cash up-front and then recognized as an Income
Statement expense over the years
c. They are an Asset because, similar to other non-cash charges, they may save
the company on taxes
d. They are a "plug" in an LBO model to make the Balance Sheet balance -
ANSWER Explanation: The correct answer choices are A, B, and C.
Capitalized Financing Fees are similar to Prepaid Expenses and also similar to how
PP&E is treated on the Balance Sheet. The expense is paid up-front in cash and
then 'capitalized' on the Balance Sheet as an Asset. Then each period the expense is
recognized on the Income Statement, similar to how PP&E is depreciated over
time. The other reason they are considered an Asset is because all Assets provide
future benefits or cash savings. In this case, the annual expense associated with this
, 3|Page
Asset flows through to the Income Statement and reduces the amount of taxable
income, but is not an actual cash expense itself - so it saves the company on taxes,
similar to Depreciation. Answer choice D is false in that the true "plug" to make
the Balance Sheet balance is Goodwill created, not the Capitalized Financing Fees.
Which of the following statements are TRUE regarding the use of the Revolver
and when you draw on it?
a. The Revolver is drawn when the cash required for Mandatory Debt
Repayment exceeds the cash flows available for debt repayment (i.e. FCF in an
LBO model)
b. The Revolver starts off undrawn - similar to a personal credit card with a
fixed
credit line
c. A drawn Revolver is the first debt tranche to be repaid with excess cash in
subsequent periods before any repayment of Term Loans
d. Revolvers are the first debt tranche to be repaid with excess cash because
they are the most expensive form of LBO financing - ANSWER Explanation:
The correct answer choices are A, B, and C. All of the above statements with the
exception of D are true statements. The purpose of the Revolver is to draw it down
