LBO Model Exam Questions & Answers

LBO Model Exam Questions & Answers 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 a