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 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:
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 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:
