100% satisfaction guarantee Immediately available after payment Both online and in PDF No strings attached
logo-home
LBO MODEL EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED GUARANTEED PASS GRADED A++ $10.49   Add to cart

Exam (elaborations)

LBO MODEL EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED GUARANTEED PASS GRADED A++

 4 views  0 purchase
  • Course
  • Institution

LBO MODEL EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED GUARANTEED PASS GRADED A++ Walk me through a basic LBO model. "In an LBO Model, Step 1 is making assumptions about the Purchase Price, Debt/Equity ratio, Interest Rate on Debt and other variables; you might also assume some...

[Show more]

Preview 3 out of 22  pages

  • October 31, 2024
  • 22
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers
avatar-seller
LBO MODEL EXAM QUESTIONS AND ANSWERS WITH

COMPLETE SOLUTIONS VERIFIED GUARANTEED PASS

GRADED A++


Walk me through a basic LBO model.

"In an LBO Model,

Step 1 is making assumptions about the Purchase Price, Debt/Equity

ratio, Interest Rate on Debt and other variables; you might also assume something

about the company's operations, such as Revenue Growth or Margins, depending on

how much information you have.

Step 2 is to create a Sources & Uses section, which shows how you finance the

transaction and what you use the capital for; this also tells you how much Investor

Equity is required.

Step 3 is to adjust the company's Balance Sheet for the new Debt and Equity

figures, and also add in Goodwill & Other Intangibles on the Assets side to make

everything balance.

In Step 4, you project out the company's Income Statement, Balance Sheet

and Cash Flow Statement, and determine how much debt is paid off each year, based

on the available Cash Flow and the required Interest Payments.

,Finally, in Step 5, you make assumptions about the exit after several years, usually

assuming an EBITDA Exit Multiple, and calculate the return based on how much equity

is returned to the firm."

Why would you use leverage when buying a company?

To boost your return.

Remember, any debt you use in an LBO is not "your money" - so if you're paying $5

billion for a company, it's easier to earn a high return on $2 billion of your own money

and $3 billion borrowed from elsewhere vs. $3 billion of your own money and $2 billion

of borrowed money.

A secondary benefit is that the firm also has more capital available to purchase other

companies because they've used leverage.

What variables impact an LBO model the most?

Purchase and exit multiples have the biggest impact on the returns of a model. After

that, the amount of leverage (debt) used also has a significant impact, followed by

operational characteristics such as revenue growth and EBITDA margins.

How do you pick purchase multiples and exit multiples in an LBO model?

The same way you do it anywhere else: you look at what comparable companies are

trading at, and what multiples similar LBO transactions have had. As always, you also

show a range of purchase and exit multiples using sensitivity tables.



Sometimes you set purchase and exit multiples based on a specific IRR target that

you're trying to achieve - but this is just for valuation purposes if you're using an LBO

model to value the company.

, What is an “ideal” candidate for an LBO?

"Ideal" candidates have stable and predictable cash flows, low‐risk businesses, not

much need for ongoing investments such as Capital Expenditures, as well as an

opportunity for expense reductions to boost their margins. A strong management team

also helps, as does a base of assets to use as collateral for debt.



The most important part is stable cash flow.

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?

You use it to value a company by setting a targeted IRR (for example, 25%) and then

back‐solving in Excel 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.

The most common example is taking out a mortgage when you buy a house. Here’s

how the analogy works:

 Down Payment: Investor Equity in an LBO

 Mortgage: Debt in an LBO

 Mortgage Interest Payments: Debt Interest in an LBO

 Mortgage Repayments: Debt Principal Repayments in an LBO

 Selling the House: Selling the Company / Taking It Public in an LBO

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller AcademicSuperScores. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for $10.49. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

64438 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 14 years now

Start selling
$10.49
  • (0)
  Add to cart