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LBO MODEL EXAM WALL STREET PREP EXAM
ALL QUESTIONS AND CORRECT ANSWERS
ALREQADY GRADED|| LATEST AND COMPLETE
VERSION WITH VERIFIED SOLUTIONS|| ASSURED
PASS!!!
What is an LBO? - - ANSWER: A leveraged buyout is the acquisition of a
company using debt instruments as the majority of the purchase price.
Pros:
1. Valuation is realistic as it does not require synergies to achieve. Cons:
1. Ignoring synergies could result in an underestimated valuation.
2. Very sensitive to operating (growth rate, margins, etc) and financial
(multiples) assumptions.
Why would you use leverage when buying a company? - - ANSWER: To boost
the investor's return.
The less of their own capital is invested, the easier it is to earn a higher return.
Another benefit is that the investor also has more capital available to purchase
other companies because they've used leverage.
What variables impact an LBO model the most? - - ANSWER: 1. Purchase and
exit multiples have the biggest impact on the returns of a model.
2. The amount of leverage (debt) used also has a significant impact.
3. Operational characteristics such as revenue growth and EBITDA margins.
How do you pick purchase multiples and exit multiples in an LBO model? - -
ANSWER: You look at the range of multiples for similar LBO transactions of
comparable companies, and choose the multiples appropriate for your situation.
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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? - - ANSWER: "Ideal" candidates
have:
1. Stable and predictable cash flows
2. Low-risk businesses
3. Not much need for ongoing investments such as CapEx
4. Opportunities for expense reductions to boost their margins
5. A strong management team
6. A base of assets to use as collateral for debt The most important part is
stable cash flow.
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? - - ANSWER: You use it
to value a company by setting a targeted IRR (e.g., 25%) and then back-solving 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 example of a "real-life" LBO. - - ANSWER: The most common
analogy is taking out a mortgage when you buy a house.
• Down Payment: Investor Equity
• Mortgage: Debt
• Mortgage Interest Payments: Debt Interest
• Mortgage Repayments: Debt Principal Repayments
LBO MODEL EXAM WALL STREET PREP EXAM
ALL QUESTIONS AND CORRECT ANSWERS
ALREQADY GRADED|| LATEST AND COMPLETE
VERSION WITH VERIFIED SOLUTIONS|| ASSURED
PASS!!!
What is an LBO? - - ANSWER: A leveraged buyout is the acquisition of a
company using debt instruments as the majority of the purchase price.
Pros:
1. Valuation is realistic as it does not require synergies to achieve. Cons:
1. Ignoring synergies could result in an underestimated valuation.
2. Very sensitive to operating (growth rate, margins, etc) and financial
(multiples) assumptions.
Why would you use leverage when buying a company? - - ANSWER: To boost
the investor's return.
The less of their own capital is invested, the easier it is to earn a higher return.
Another benefit is that the investor also has more capital available to purchase
other companies because they've used leverage.
What variables impact an LBO model the most? - - ANSWER: 1. Purchase and
exit multiples have the biggest impact on the returns of a model.
2. The amount of leverage (debt) used also has a significant impact.
3. Operational characteristics such as revenue growth and EBITDA margins.
How do you pick purchase multiples and exit multiples in an LBO model? - -
ANSWER: You look at the range of multiples for similar LBO transactions of
comparable companies, and choose the multiples appropriate for your situation.
, 2|Page
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? - - ANSWER: "Ideal" candidates
have:
1. Stable and predictable cash flows
2. Low-risk businesses
3. Not much need for ongoing investments such as CapEx
4. Opportunities for expense reductions to boost their margins
5. A strong management team
6. A base of assets to use as collateral for debt The most important part is
stable cash flow.
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? - - ANSWER: You use it
to value a company by setting a targeted IRR (e.g., 25%) and then back-solving 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 example of a "real-life" LBO. - - ANSWER: The most common
analogy is taking out a mortgage when you buy a house.
• Down Payment: Investor Equity
• Mortgage: Debt
• Mortgage Interest Payments: Debt Interest
• Mortgage Repayments: Debt Principal Repayments
