BIWS LBO UPDATED Actual Questions and CORRECT Answers
7 views 0 purchase
Course
BIWS LBO
Institution
BIWS LBO
BIWS LBO UPDATED Actual Questions
and CORRECT Answers
What is a leveraged buyout, and why does it work? - CORRECT ANSWER- - PE firm
acquires a company using a combination of debt and equity
- it operates it for several years
- then sells the company at the end of the period to realize a retu...
BIWS LBO UPDATED Actual Questions
and CORRECT Answers
What is a leveraged buyout, and why does it work? - CORRECT ANSWER- ✔✔- PE firm
acquires a company using a combination of debt and equity
- it operates it for several years
- then sells the company at the end of the period to realize a return on its investment
- during the ownership period, the PE firm uses the company's cash flows to pay for the debt
interest expense and to repay the debt principal
IT WORKS BECAUSE
- leverage amplifies returns
- if the deal performs well, the PE firm will realize higher returns than if it had bought the
company with 100% equity
- BUT leverage also presents risks because it means the returns will be even WORSE if the
deal goes wrong
Why do PE firms use leverage when buying companies? - CORRECT ANSWER- ✔✔- to
amplify their returns
- using leverage (borrowing money from others) makes positive returns even MORE positive
- leverage also makes negative returns even MORE negative
- using leverage makes it easier to reach IRR
- also more capital to buy add-on acquisitions
Walk me through a basic LBO model. - CORRECT ANSWER- ✔✔1) make assumptions for
- purchase price
- debt and equity
- interest rate on debt
- revenue growth
- EBITDA and profit margins
,2) create a Sources & Uses schedule
- shows how much in investor equity the PE firm contributes
- also create a purchase price allocation schedule (PPA schedule) to calculate goodwill
3) adjust the BS for new debt and equity figures
- allocate the purchase price
- add goodwill and other intangible assets
4) project IS, CFS, and BS
- determine how much debt company repays each year
5) make assumptions about the exit
- assume an EBITDA exit multiple
- calculate IRR and MoM
Can you explain the legal structure behind a leveraged buyout and how it benefits the PE
firm? - CORRECT ANSWER- ✔✔- PE firm forms a holding company, which it owns
- holding company acquires the real company
- banks and other lenders provide debt to holding company
- managers and executives at the acquired company can retain ownership after acquisition
(rolling-over shares)
- up to the target company, NOT PE firm, to repay debt
What assumptions impact a leveraged buyout the most? - CORRECT ANSWER- ✔✔-
purchase and exit assumptions (based on EBITDA multiples)
- lower purchase multiple - higher returns
- higher exit multiple - higher returns
- want lower purchase multiple, higher exit multiple
- afterwards, % debt used makes the biggest impact
, How do you select the purchase multiples and exit multiples in an LBO model? - CORRECT
ANSWER- ✔✔PUBLIC COMPANIES
- assume a share-price premium
- check purchase multiple
- example: assume a 30% premium to company's share price of $10
- EV/EBITDA multiple of 10X
PRIVATE COMPANIES
- look at comparable companies, precedent transactions, and DCF
- always use a range of purchase and exit multiples via sensitivity tables
What is an ideal candidate for an LBO? - CORRECT ANSWER- ✔✔- stable and predictable
cash flows (repay its debt)
- low CapEx spending
- highly fragmented industry for add-on acquisitions
- strong management team (roll over equity too)
- realistic path to an exit
- based on EBITDA growth and debt pay down, NOT multiple expansion
How do you use an LBO model to value a company, and why does it set the "floor valuation"
for the company? - CORRECT ANSWER- ✔✔- value a company by setting a targeted IRR
(25%)
- use goal seek function in Excel (determines purchase price the PE firm could pay for
targeted IRR)
EXAMPLE
- exit multiple is 11X
- $1,000 equity proceeds
- goal seek function
- firm could pay $328 in investor equity for 25% IRR over 5 years
- 50% debt/equity split
- Purchase enterprise value of $656
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 or Stuvia-credit 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 MGRADES. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.99. You're not tied to anything after your purchase.
