Private Equity Fundamentals Study Questions and Answers Verified 2026.docx

Private Equity
Fundamentals Study
Questions And
Answers Verified 2026

, What is an LBO - correct answerFinancial sponsor purchases an company using debt in the form of
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instruments such as loans and bonds. Firm then get majority control then work on making the business better
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through restructuring, operational improvements, restructuring and asset sales to make the company more
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efficient at generating cash flow to pay down debt quicker. Investment horizon is 5-7 years and firms exit
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through either sale of asset or an IPO. k k k k k k k




What is the intuition underlying the usage of debt in an LBO? - correct answerHigh percentage of borrowed
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funds with small initial equity investment. As debt principal is paid down the sponsor will realize greater gains
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on exit. Therefore firms try to maximize leverage while keeping the debt level manageable to avoid
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bankruptcy risk. Want more debt because it is cheaper and interest expense is tax deductible which creates a
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tax shield.
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What are the main levers in an LBO that drive returns? - correct answer1. Debt Paydown: deleveraging the
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value of PE firms equity value grows over time as debt is paid down.
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2. EBITDA growth: operational improvements to business margin profile
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3. Multiple Expansion: higher exit multiple than entry through imporved investor sentiment, better economic
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conditions.



What attributes make a business an ideal LBO candidate? - correct answer1. Strong Cash Flow Generation:
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predictable FCF generation with high margins k k k k k k




2. Recurring Revenue: little risk associate with cash flows
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3. Economic Moat: differentiating factor
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4. Favorable unit economics: high margins, well-managed cost structure
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5. Strong committed management team
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6. Undervalued company with strong value-added opportunities.
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What types of industries attract more deal flow from financial buyers? - correct answerNon-cyclical/ low
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growth

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What would be the ideal type of product/service of a potential LBO target? - correct answerProduct should be
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deeply imbedded in customers operations.
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