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Walk me through a basic LBO model - ANSWERIn an LBO Model, Step 1 is making assumptions about the Purchase Price, Debt/Equity ratio, Interest Rate on Debt and other variables; you might also assume something about the company's operations, such as Revenue Growth or Margins, depending on how much information you have. Step 2 is to create a Sources & Uses section, which shows how you finance the transaction and what you use the capital for; this also tells you how much Investor Equity is ...

What is a leveraged buyout, and why does it work? - ANSWERIn a leveraged buyout (LBO), a private equity firm acquires a company using a combination of debt and equity, operates it for several years, possibly makes operational improvements, and then sells the company at the end of the period to realize a return on investment. During the period of ownership the PE firm uses the company's cash flows to pay interest expense from the debt and to pay off debt principal. An LBO delivers higher...

LBO MODLE GUIDE EXAM QUESTIONS AND VERIFIED ANSWERS/ACCURATE SOLUTIONS | UPDATE|GET IT 100% CORRECT!! ALREADY GRADED What is a leveraged buyout, and why does it work? - ANSWERIn a leveraged buyout (LBO), a private equity firm acquires a company using a combination of debt and equity (cash), operates it for several years, possibly makes operational improvements, and then sells the company at the end of the period to realize a return on investment. During the period of ownership, the PE fi...

LBO Characteristics - ANSWERPotential targets have predictable cash flows and substantial assets. 60% to 70% debt vs. 30% to 40% from financial sponsors (equity contribution). Sponsors have sought a 20% annual return and an "exit" within five years. Growing in the past three decades due to the proliferation of junk bond market and the private investment vehicles. Key Participants - ANSWERFinancial Sponsors Investment Banks Capital Providers Target MGMT Financial Sponso...

12.1 Why would you want to use leverage when you buy a company, or when you buy a house - ANSWERIt reduces how much you have to pay in cash upfront. It makes it easier to earn a higher return on your investment... if it performs well. Because money today is worth more than money tomorrow. 12.2 Who is the "buyer" in a leveraged buyout - ANSWERA shell holding corporation created by the private equity firm. Unsecured Debt has bullet maturity, whereas Secured Debt tends to have pri...

All of the following types of debt are typically "floating-rate" instruments used to finance an LBO EXCEPT: a. Subordinated Notes b. Term Loan A c. Term Loan B d. Revolver e. None of the above - ANSWERExplanation: The correct answer choice is A. All of the answer choices listed above with the exception of A are floating-rate debt instruments, meaning that its interest rate is not fixed (e.g. 8% each year until maturity) but rather tied to something like LIBOR (e.g. LIBOR + ...

What is a leveraged buyout, and why does it work? - ANSWERIn a leveraged buyout (LBO), a private equity firm acquires a company using a combination of debt and equity, operates it for several years, possibly makes operational improvements, and then sells the company at the end of the period to realize a return on investment. During the period of ownership the PE firm uses the company's cash flows to pay interest expense from the debt and to pay off debt principal. An LBO delivers higher...

LBO Characteristics - ANSWERPotential targets have predictable cash flows and substantial assets. 60% to 70% debt vs. 30% to 40% from financial sponsors (equity contribution). Sponsors have sought a 20% annual return and an "exit" within five years. Growing in the past three decades due to the proliferation of junk bond market and the private investment vehicles. Key Participants - ANSWERFinancial Sponsors Investment Banks Capital Providers Target MGMT Financial Sponso...

12.1 Why would you want to use leverage when you buy a company, or when you buy a house - ANSWERIt reduces how much you have to pay in cash upfront. It makes it easier to earn a higher return on your investment... if it performs well. Because money today is worth more than money tomorrow. 12.2 Who is the "buyer" in a leveraged buyout - ANSWERA shell holding corporation created by the private equity firm. 12.3 What is the MAIN difference between a normal M&A deal and an LBO th...

All of the following types of debt are typically "floating-rate" instruments used to finance an LBO EXCEPT: a. Subordinated Notes b. Term Loan A c. Term Loan B d. Revolver e. None of the above - ANSWERExplanation: The correct answer choice is A. All of the answer choices listed above with the exception of A are floating-rate debt instruments, meaning that its interest rate is not fixed (e.g. 8% each year until maturity) but rather tied to something like LIBOR (e.g. LIBOR + ...