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LBO MODEL (BASIC) EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE

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LBO MODEL (BASIC) EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE What is an LBO? -A type of acquisition where a company is bought using mostly debt. -The idea is that a small amount of equity is combined with a large amount of debt to buy a company. Why do we use LB...

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  • October 31, 2024
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  • 2024/2025
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LBO MODEL (BASIC) EXAM QUESTIONS AND ANSWERS

WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE


What is an LBO?

-A type of acquisition where a company is bought using mostly debt.

-The idea is that a small amount of equity is combined with a large amount of debt to

buy a company.

Why do we use LBOs?

-Isn't to value a company

-Instead, it's to determine if buying a company using mostly debt is a good idea and

whether investors (PE firms) can make a return on their money

-The goal is for the company's future cash flows (its earnings) to pay off the debt over

time and eventually sell the company at a profit

Walk me through a basic LBO Model

1) Make Assumptions

-Estimate the purchase price (Given or estimated)

-How much of the deal is funded by debt vs equity

-The interest rate on debt



2) Sources & Uses

-Show where the money is coming from (debt/equity) and how it's being used (buying

the company, paying the fees)

, 3) Balance Sheet Adjustments

-Update the BS to include the new debt and equity, ensuring it balances



4) Future Financial Projections

-Project the company's future financials (income, cash flow) and figure out how much

debt get paid off yearly



5) Exit Assumptions

-Estimate the company's value at sale (usually 3-7yrs) using an EBITDA multiple and

calculate how much investors will earn from the sale

-If return is good (PE firms aim for around 20-25% Annual Return) deal will go through

Why would you use leverage when buying a company

-Increases your returns because you're using less of you're own money

-An additional benefit is by using less of your own money, the firm still has more of its

own capital available to invest in other companies

What variables impact an LBO model the most?

-Purchase multiple: How much you pay for the company. If you pay too much upfront,

it's harder to make a profit later

-Exit multiple: This is the value of the company when you sell it. The higher you can sell

the company for, the better the returns for the invetors



After these two, the other factors that have a big impact are:

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