1
APEA Predictor Exam Questions & Answers Latest
2024/2025 (Complete Solution A+)
Section 1: LBO Modeling & Returns
Q1
What is the minimum IRR generally targeted by a mid-market private equity fund?
• A) 5–10%
• B) 10–14%
• C) 20–25%
• D) 30–35%
Answer: C) 20–25%
Rationale: Mid-market PE funds typically target 20–25% gross IRR. Larger megafunds
may target slightly lower (15–20%), but 20%+ is standard for risk-adjusted returns.
Q2
If a company is acquired for $500M with $300M debt and $200M equity, and sold after
5 years for $800M with $200M debt remaining, what is the equity IRR?
• A) ~25%
• B) ~32%
• C) ~40%
• D) ~18%
Answer: B) ~32%
Rationale: Initial equity = $200M. Exit proceeds to equity = $800M – $200M debt =
$600M. MOIC = 3.0x over 5 years → approximate IRR = 3^(1/5)-1 = 24.6%, but with
interim debt paydown/cash accumulation, actual IRR ~32% in standard PE models.
Q3
Which debt tranche is typically paid off first in a cash flow sweep?
• A) Senior secured
• B) Second lien
• C) Subordinated notes
• D) PIK toggle
,2
Answer: A) Senior secured
Rationale: Senior secured debt has priority in repayment. Cash flow sweeps allocate
excess cash first to senior debt per the credit agreement.
Q4
In an LBO model, which of the following would increase IRR?
• A) Higher purchase price
• B) Lower exit multiple
• C) Higher leverage (same cost of debt)
• D) Longer holding period
Answer: C) Higher leverage (same cost of debt)
Rationale: Higher leverage increases equity return if the cost of debt is below the asset
return. More debt means less equity upfront, amplifying MOIC.
Q5
What is the standard formula for MOIC?
• A) (Total cash out / Total cash in) – 1
• B) Total cash returned / Total cash invested
• C) (Exit EV – Debt)/Initial Equity
• D) Exit EV / Initial EV
Answer: B) Total cash returned / Total cash invested
Rationale: MOIC (Multiple on Invested Capital) ignores time value — just a ratio of total
distributions to contributed capital.
Q6
A PE firm buys a company for 10x EBITDA of $100M. Debt = 6x EBITDA. Exit EBITDA =
$120M at 8x. Exit debt = 3x EBITDA. Equity IRR effect?
• A) Decreases IRR
• B) Increases IRR
• C) No change
• D) Depends on tax rate
Answer: B) Increases IRR
Rationale: Exit multiple contraction (10x→8x) hurts, but EBITDA growth and debt
paydown help. Initial equity = $400M. Exit equity = ($120M×8) – ($120M×3) = $960M –
$360M = $600M. MOIC = 1.5x → IRR positive.
, 3
Q7
What is the primary purpose of a sources & uses table?
• A) Show income statement projections
• B) Track cash position over time
• C) Explain how purchase is funded and where funds go
• D) Calculate working capital
Answer: C) Explain how purchase is funded and where funds go
Rationale: Sources = debt + equity. Uses = purchase price + fees + debt repayment.
Q8
A PIK toggle allows a company to:
• A) Pay interest in cash or additional debt
• B) Convert debt to equity at will
• C) Skip principal payments forever
• D) Avoid senior debt covenants
Answer: A) Pay interest in cash or additional debt
Rationale: PIK (Payment-in-Kind) toggle gives the borrower flexibility to pay interest by
issuing more debt instead of cash.
Q9
If a PE fund contributes 40% equity and debt is 60%, equity IRR is 25%. If equity
contribution drops to 30% (more debt), all else equal, IRR will:
• A) Decrease
• B) Increase
• C) Stay the same
• D) Become negative
Answer: B) Increase
Rationale: More leverage amplifies returns. Same exit equity value spread over smaller
initial equity = higher IRR.
Q10
Which is NOT a common exit strategy in PE?
• A) Strategic sale
• B) IPO
• C) Secondary buyout
• D) Liquidation at book value
APEA Predictor Exam Questions & Answers Latest
2024/2025 (Complete Solution A+)
Section 1: LBO Modeling & Returns
Q1
What is the minimum IRR generally targeted by a mid-market private equity fund?
• A) 5–10%
• B) 10–14%
• C) 20–25%
• D) 30–35%
Answer: C) 20–25%
Rationale: Mid-market PE funds typically target 20–25% gross IRR. Larger megafunds
may target slightly lower (15–20%), but 20%+ is standard for risk-adjusted returns.
Q2
If a company is acquired for $500M with $300M debt and $200M equity, and sold after
5 years for $800M with $200M debt remaining, what is the equity IRR?
• A) ~25%
• B) ~32%
• C) ~40%
• D) ~18%
Answer: B) ~32%
Rationale: Initial equity = $200M. Exit proceeds to equity = $800M – $200M debt =
$600M. MOIC = 3.0x over 5 years → approximate IRR = 3^(1/5)-1 = 24.6%, but with
interim debt paydown/cash accumulation, actual IRR ~32% in standard PE models.
Q3
Which debt tranche is typically paid off first in a cash flow sweep?
• A) Senior secured
• B) Second lien
• C) Subordinated notes
• D) PIK toggle
,2
Answer: A) Senior secured
Rationale: Senior secured debt has priority in repayment. Cash flow sweeps allocate
excess cash first to senior debt per the credit agreement.
Q4
In an LBO model, which of the following would increase IRR?
• A) Higher purchase price
• B) Lower exit multiple
• C) Higher leverage (same cost of debt)
• D) Longer holding period
Answer: C) Higher leverage (same cost of debt)
Rationale: Higher leverage increases equity return if the cost of debt is below the asset
return. More debt means less equity upfront, amplifying MOIC.
Q5
What is the standard formula for MOIC?
• A) (Total cash out / Total cash in) – 1
• B) Total cash returned / Total cash invested
• C) (Exit EV – Debt)/Initial Equity
• D) Exit EV / Initial EV
Answer: B) Total cash returned / Total cash invested
Rationale: MOIC (Multiple on Invested Capital) ignores time value — just a ratio of total
distributions to contributed capital.
Q6
A PE firm buys a company for 10x EBITDA of $100M. Debt = 6x EBITDA. Exit EBITDA =
$120M at 8x. Exit debt = 3x EBITDA. Equity IRR effect?
• A) Decreases IRR
• B) Increases IRR
• C) No change
• D) Depends on tax rate
Answer: B) Increases IRR
Rationale: Exit multiple contraction (10x→8x) hurts, but EBITDA growth and debt
paydown help. Initial equity = $400M. Exit equity = ($120M×8) – ($120M×3) = $960M –
$360M = $600M. MOIC = 1.5x → IRR positive.
, 3
Q7
What is the primary purpose of a sources & uses table?
• A) Show income statement projections
• B) Track cash position over time
• C) Explain how purchase is funded and where funds go
• D) Calculate working capital
Answer: C) Explain how purchase is funded and where funds go
Rationale: Sources = debt + equity. Uses = purchase price + fees + debt repayment.
Q8
A PIK toggle allows a company to:
• A) Pay interest in cash or additional debt
• B) Convert debt to equity at will
• C) Skip principal payments forever
• D) Avoid senior debt covenants
Answer: A) Pay interest in cash or additional debt
Rationale: PIK (Payment-in-Kind) toggle gives the borrower flexibility to pay interest by
issuing more debt instead of cash.
Q9
If a PE fund contributes 40% equity and debt is 60%, equity IRR is 25%. If equity
contribution drops to 30% (more debt), all else equal, IRR will:
• A) Decrease
• B) Increase
• C) Stay the same
• D) Become negative
Answer: B) Increase
Rationale: More leverage amplifies returns. Same exit equity value spread over smaller
initial equity = higher IRR.
Q10
Which is NOT a common exit strategy in PE?
• A) Strategic sale
• B) IPO
• C) Secondary buyout
• D) Liquidation at book value
