LBO MODEL (BASIC) EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE
4 views 0 purchase
Course
LBO
Institution
LBO
LBO MODEL (BASIC) EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED LATEST UPDATE
What is an LBO?
-A type of acquisition where a company is bought using mostly debt.
-The idea is that a small amount of equity is combined with a large amount of debt to buy a company.
Why do we use LB...
-A type of acquisition where a company is bought using mostly debt.
-The idea is that a small amount of equity is combined with a large amount of debt to
buy a company.
Why do we use LBOs?
-Isn't to value a company
-Instead, it's to determine if buying a company using mostly debt is a good idea and
whether investors (PE firms) can make a return on their money
-The goal is for the company's future cash flows (its earnings) to pay off the debt over
time and eventually sell the company at a profit
Walk me through a basic LBO Model
1) Make Assumptions
-Estimate the purchase price (Given or estimated)
-How much of the deal is funded by debt vs equity
-The interest rate on debt
2) Sources & Uses
-Show where the money is coming from (debt/equity) and how it's being used (buying
the company, paying the fees)
, 3) Balance Sheet Adjustments
-Update the BS to include the new debt and equity, ensuring it balances
4) Future Financial Projections
-Project the company's future financials (income, cash flow) and figure out how much
debt get paid off yearly
5) Exit Assumptions
-Estimate the company's value at sale (usually 3-7yrs) using an EBITDA multiple and
calculate how much investors will earn from the sale
-If return is good (PE firms aim for around 20-25% Annual Return) deal will go through
Why would you use leverage when buying a company
-Increases your returns because you're using less of you're own money
-An additional benefit is by using less of your own money, the firm still has more of its
own capital available to invest in other companies
What variables impact an LBO model the most?
-Purchase multiple: How much you pay for the company. If you pay too much upfront,
it's harder to make a profit later
-Exit multiple: This is the value of the company when you sell it. The higher you can sell
the company for, the better the returns for the invetors
After these two, the other factors that have a big impact are:
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 NurseAdvocate. 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.
