Breaking Into Wall
Street Lbo Exam 2024
Update
What is an "ideal" candidate for an LBO? - ✔✔✔ANSWER-ideal candidates:
- stable and predictable cash flows
- should be undervalued relative to peers
- be low risk businesses
- not have much need for ongoing investments
- have an opportunity to cut costs and increase margins
- strong management team
- solid base of assets
, A strategic acquirer prefers to pay for another company with 100% cash - if that's
the case, why would a PE firm want to use debt in an LBO? - ✔✔✔ANSWER--
PE firm does not hold the company for long term, sells after a few years
- LBO, the company is responsible for repaying the debt so the company assumes
much of the risk
DCF vs LBO - ✔✔✔ANSWER-DCF look at present values of its near future and
far future cash flows
LBO looking at what we can pay for this company if we want to achieve an IRR
Do you need to project all 3 statements in an LBO model? Are there any short
cuts? - ✔✔✔ANSWER-Yes, there are shortcuts and you do not need project all 3
statements. You need IS, something to track how the debt balances change and
some type of Cash Flow Statement to show how much cash is available to repay
debt.
Give me an example of a real life LBO - ✔✔✔ANSWER-buying a house that you
rent out to other people
- down payment: investor equity
- mortgage: debt
- mortgage interest payments: debt interest
- mortgage repayments: debt principal repayments
- rental income from tenants: cash flow to pay interest and repay debt
- selling the house: selling the company or taking it public
How can you estimate the IRR in an LBO? Are there any rules of thumb? -
✔✔✔ANSWER-- if a PE firm doubles its money in 5 years, that's a 15% IRR
- if a PE firm triples its money in 5 years, that's a 25% IRR
Street Lbo Exam 2024
Update
What is an "ideal" candidate for an LBO? - ✔✔✔ANSWER-ideal candidates:
- stable and predictable cash flows
- should be undervalued relative to peers
- be low risk businesses
- not have much need for ongoing investments
- have an opportunity to cut costs and increase margins
- strong management team
- solid base of assets
, A strategic acquirer prefers to pay for another company with 100% cash - if that's
the case, why would a PE firm want to use debt in an LBO? - ✔✔✔ANSWER--
PE firm does not hold the company for long term, sells after a few years
- LBO, the company is responsible for repaying the debt so the company assumes
much of the risk
DCF vs LBO - ✔✔✔ANSWER-DCF look at present values of its near future and
far future cash flows
LBO looking at what we can pay for this company if we want to achieve an IRR
Do you need to project all 3 statements in an LBO model? Are there any short
cuts? - ✔✔✔ANSWER-Yes, there are shortcuts and you do not need project all 3
statements. You need IS, something to track how the debt balances change and
some type of Cash Flow Statement to show how much cash is available to repay
debt.
Give me an example of a real life LBO - ✔✔✔ANSWER-buying a house that you
rent out to other people
- down payment: investor equity
- mortgage: debt
- mortgage interest payments: debt interest
- mortgage repayments: debt principal repayments
- rental income from tenants: cash flow to pay interest and repay debt
- selling the house: selling the company or taking it public
How can you estimate the IRR in an LBO? Are there any rules of thumb? -
✔✔✔ANSWER-- if a PE firm doubles its money in 5 years, that's a 15% IRR
- if a PE firm triples its money in 5 years, that's a 25% IRR
