TRANSACTION COMPS AND LBO MODELING
EXAM FINAL PAPER 2026 COMPLETE
QUESTIONS AND ANSWERS FULL SOLUTION
GRADED A+
◉ 2. Why would you use leverage when buying a company? Answer:
To boost your return.Remember, any debt you use in an LBO is not
"your money" - so if you're paying $5 billion for a company, it's
easier to earn a high return on $2 billion of your own money and $3
billion borrowed from elsewhere vs. $3 billion of your own money
and $2 billion of borrowed money.
A secondary benefit is that the firm also has more capital available to
purchase other companies because they've used leverage.
◉ 3. What variables impact an LBO model the most? Answer:
Purchase and exit multiples have the biggest impact on the returns
of a model. After that, the amount of leverage (debt) used also has a
significant impact, followed by operational characteristics such as
revenue growth and EBITDA margins.
◉ 4. How do you pick purchase multiples and exit multiples in an
LBO model? Answer: The same way you do it anywhere else: you
look at what comparable companies are trading at, and what
multiples similar LBO transactions have had. As always, you also
show a range of purchase and exit multiples using sensitivity tables.
, Sometimes you set purchase and exit multiples based on a specific
IRR target that you're trying to achieve - but this is just for valuation
purposes if you're using an LBO model to value the company.
◉ 5. What is an "ideal" candidate for an LBO? Answer: "Ideal"
candidates have stable and predictable cash flows, low-risk
businesses, not much need for ongoing investments such as Capital
Expenditures, as well as an opportunity for expense reductions to
boost their margins. A strong management team also helps, as does
a base of assets to use as collateral for debt.
The most important part is stable cash flow.
◉ 6. How do you use an LBO model to value a company, and why do
we sometimes say that it sets the "floor valuation" for the company?
Answer: You use it to value a company by setting a targeted IRR (for
example, 25%) and then back-solving in Excel to determine what
purchase price the PE firm could pay to achieve that IRR.This is
sometimes called a "floor valuation" because PE firms almost always
pay less for a company than strategic acquirers would.
◉ 7. Give an example of a "real-life" LBO. Answer: The most common
example is taking out a mortgage when you buy a house. Here's how
the analogy works:
Down Payment: Investor Equity in an LBO
Mortgage: Debt in an LBO
Mortgage Interest Payments: Debt Interest in an LBO
EXAM FINAL PAPER 2026 COMPLETE
QUESTIONS AND ANSWERS FULL SOLUTION
GRADED A+
◉ 2. Why would you use leverage when buying a company? Answer:
To boost your return.Remember, any debt you use in an LBO is not
"your money" - so if you're paying $5 billion for a company, it's
easier to earn a high return on $2 billion of your own money and $3
billion borrowed from elsewhere vs. $3 billion of your own money
and $2 billion of borrowed money.
A secondary benefit is that the firm also has more capital available to
purchase other companies because they've used leverage.
◉ 3. What variables impact an LBO model the most? Answer:
Purchase and exit multiples have the biggest impact on the returns
of a model. After that, the amount of leverage (debt) used also has a
significant impact, followed by operational characteristics such as
revenue growth and EBITDA margins.
◉ 4. How do you pick purchase multiples and exit multiples in an
LBO model? Answer: The same way you do it anywhere else: you
look at what comparable companies are trading at, and what
multiples similar LBO transactions have had. As always, you also
show a range of purchase and exit multiples using sensitivity tables.
, Sometimes you set purchase and exit multiples based on a specific
IRR target that you're trying to achieve - but this is just for valuation
purposes if you're using an LBO model to value the company.
◉ 5. What is an "ideal" candidate for an LBO? Answer: "Ideal"
candidates have stable and predictable cash flows, low-risk
businesses, not much need for ongoing investments such as Capital
Expenditures, as well as an opportunity for expense reductions to
boost their margins. A strong management team also helps, as does
a base of assets to use as collateral for debt.
The most important part is stable cash flow.
◉ 6. How do you use an LBO model to value a company, and why do
we sometimes say that it sets the "floor valuation" for the company?
Answer: You use it to value a company by setting a targeted IRR (for
example, 25%) and then back-solving in Excel to determine what
purchase price the PE firm could pay to achieve that IRR.This is
sometimes called a "floor valuation" because PE firms almost always
pay less for a company than strategic acquirers would.
◉ 7. Give an example of a "real-life" LBO. Answer: The most common
example is taking out a mortgage when you buy a house. Here's how
the analogy works:
Down Payment: Investor Equity in an LBO
Mortgage: Debt in an LBO
Mortgage Interest Payments: Debt Interest in an LBO
