LBO MODEL - ADVANCED EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE
7 views 0 purchase
Module
LBO
Institution
LBO
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 ...
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
The benefits of buying summaries with Stuvia:
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
You can quickly pay through credit card for the summaries. There is no membership needed.
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 £8.11. You're not tied to anything after your purchase.
