LBO MODELLING EXAM FROM WALL STREET
PREP 2024
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? - ANSYou use it to value a company by setting a targeted IRR (e.g., 25%) and
then back-solving to determine what pur...
LBO MODELLING EXAM FROM WALL STREET
PREP 2024
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? - ANS-
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. - ANS-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
• Selling the House: Selling the Company / Taking It Public
Can you explain how the Balance Sheet is adjusted in an LBO model? -
ANS-First, the Liabilities & Equities side is adjusted - the new debt is
added on, and the Shareholders' Equity is "wiped out" and replaced by
however much equity the private equity firm is contributing.
, What is an LBO? - ANS-A leveraged buyout is the acquisition of a
company using debt instruments as the majority of the purchase price.
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