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LBO MODEL - ADVANCED EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE $9.99   Add to cart

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LBO MODEL - ADVANCED EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE

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LBO MODEL - ADVANCED EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE Tell me about all the different kinds of debt you could use in an LBO and the differences between everything. See figure on p155 How would an asset write-up or write-down affect an LBO model? / Walk ...

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  • October 31, 2024
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  • 2024/2025
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LBO MODEL - ADVANCED EXAM QUESTIONS AND

ANSWERS WITH COMPLETE SOLUTIONS VERIFIED

LATEST UPDATE


Tell me about all the different kinds of debt you could use in an LBO and the

differences between everything.

See figure on p155

How would an asset write-up or write-down affect an LBO model? / Walk me

through how you adjust the Balance Sheet in an LBO model.

All of this is very similar to what you would see in a merger model - you calculate

Goodwill, Other Intangibles, and the rest of the write-ups in the same way, and then the

Balance Sheet adjustments (e.g. subtracting cash, adding in capitalized financing fees,

writing up assets, wiping out goodwill, adjusting the deferred tax assets / liabilities,

adding in new debt, etc.) are almost the same.



The key differences:

• In an LBO model you assume that the existing Shareholders' Equity is wiped out and

replaced by the equity the private equity firm contributes to buy the company; you may

also add in Preferred Stock, Management Rollover, or Rollover from Option Holders to

this number as well depending on what you're assuming for transaction financing.

• In an LBO model you'll usually be adding a lot more tranches of debt vs. what you

, would see in a merger model.

• In an LBO model you're not combining two companies' Balance Sheets.

Normally we care about the IRR for the equity investors in an LBO - the PE firm

that buys the company - but how do we calculate the IRR for the debt investors?

For the debt investors, you need to calculate the interest and principal payments they

receive from the company each year.



Then you simply use the IRR function in Excel and start with the negative amount of the

original debt for "Year 0," assume that the interest and principal payments each year

are your "cash flows" and then assume that the remaining debt balance in the final year

is your "exit value."



Most of the time, returns for debt investors will be lower than returns for the equity

investors - but if the deal goes poorly or the PE firm can't sell the company for a good

price, the reverse could easily be true.

Why might a private equity firm allot some of a company's new equity in an LBO

to a management option pool, and how would this affect the model?

This is done for the same reason you have an Earnout in an M&A deal: the PE firm

wants to incentivize the management team and keep everyone on-board until they exit

the investment.



The difference is that there's no technical limit on how much management might receive

from such an option pool: if they hit it out of the park, maybe they'll all become

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