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Chapter 5 (LBO Analysis) Review Questions and Correct Answers
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What are the primary functions of LBO analysis? On the financing side, the banker uses LBO analysis to help craft a viable financing structure for the target, which encompasses the amount, type, and terms of debt, as well as the equity contribution. In an M&A advisory context, the banker uses LBO a...

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  • August 14, 2024
  • 4
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • chapter 5 lbo analysis review questions and corr
  • what are the primary functions of lbo analysis o
  • how is lbo analysis used to analyze and craft fina

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Chapter 5 (LBO Analysis) Review
Questions and Correct Answers
What are the primary functions of LBO analysis? ✅On the financing side, the banker
uses LBO analysis to help craft a viable financing structure for the target, which
encompasses the amount, type, and terms of debt, as well as the equity contribution. In
an M&A advisory context, the banker uses LBO analysis to determine an implied
valuation range for a given target in a potential LBO sale based on achieving acceptable
returns.

How is LBO analysis used to analyze and craft financing structure? ✅The output
enables the banker to analyze a given financing structure on the basis of cash flow
generation, debt repayment, credit statistics, and investment returns over a projection
period.

Who chooses the preferred financing structure for a given LBO? ✅The sponsor
chooses—often a compilation of the best terms from proposals solicited from several
banks.

How is LBO analysis used to determine valuation? ✅The valuation output is premised
on assumptions for financial projections, purchase price, and financing structure, as well
as exit multiple and year (assuming an exit via a sale). Therefore, sensitivity analysis is
performed on these key value drivers to produce a range of IRRs used to frame
valuation for the target. Sponsors typically target 20%+ IRRs in assessing acquisition
opportunities and determine valuation accordingly.

What IRR threshold has historically served as the standard for sponsors in considering
an LBO? ✅20%+

Which of the following are key components of an LBO analysis transaction summary
page?
A) Sources and uses of funds
B) Capitalization and credit statistics summary
C) Debt schedule
D) Assumptions summary page ✅A) Sources and uses of funds and B) Capitalization
and credit statistics summary

Under what circumstances might a strategic buyer use LBO analysis? ✅To determine
the price a financial sponsor bidder can afford to pay when competing for an asset in an
auction process.

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