LBO Model Correct Questions & Answers(RATED A+)

What is an LBO? - ANSWER Acquisition of another company using significant amount of debt. 90% debt - 10% equity Walk me through an LBO model - ANSWER 1. Make assumptions about purchase price, debt/equity ratio, and interest rate on debt 2. Create a sources/uses section, which shows how the transaction is financed and how much investor equity is required 3. Adjust balance sheet for new debt/equity figures 4. Project out company's financial performance and determine how much debt would be paid off each year, based on available cash flow and required interest payments 5. Make assumptions about exit after several years, using EBITDA Exit Multiple 6. Calculate the return based on how much equity is returned to the firm Why would you leverage when buying a company? - ANSWER To boost your return. - Debt is not your money - retain more capital to do other things How do you pick purchase multiples and exit multiples in an LBO model? - ANSWER Look at what comparable companies are trading at and what multiples similar LBO transactions have had What is an "ideal" candidate for an LBO? - ANSWER - stable Cash flow - low-risk businesses - opportunity for expense reductions to boost their margins - strong management team 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 LBO gives a targeted IRR and then we back-solve in Excel to determine purchase price could pay to achieve that IRR. Give an example of a "real-life" LBO - ANSWER Taking out a mortgage when you buy a house How is the Balance Sheet adjusted in an LBO? - ANS