LBO Modeling / LBO Modelling Exam from Wall Street Prep 2024 PASS A+

LBO Modeling / LBO Modelling Exam from Wall Street Prep 2024 PASS A+ What do LBO FCF's tell us? - ANSWER-Tells you how much cash is available to repay *debt principal* each year after already paying for normal expenses and debt interest Can a PE firm earn a solid return if it buys a company for $1 billion and sells it for $1 billion 5 years? - ANSWER-Yes, if it uses a certain amount of debt to purchase the company- if they raise $500m, and use $500 cash, the company's FCF's are able to pay back the debt and the firm recieved $1 billion in cash at the end (15% IRR) Let's say that a PE firm borrows $10 million of debt to buy out a company, and then sells the company in 5 years at the same EBITDA multiple it purchased it for. If the PE firm does not pay off any debt during those 5 years, what's the IRR? - ANSWER-We need *more information*: we only have the EV/EBITDA multiple, and don't know how much EBITDA actually was to calculate an IRR What is the biggest difference between an LBO and an M&A? - ANSWER-Unlike an M&A, we're not assuming the PE firm will keep the company long term What makes a good LBO candidate? - ANSWER--opportunity to cut costs -stable cash flows -good base of assets -undervalued/low-risk Walk me through a basic LBO model. - ANSWER-1. Make assumptions about the Purchase Price and how much debt to use 2. Create a Financial Sources & Uses section 3. Adjust the company's Balance Sheet