LBO INTERVIEW QUESTIONS 100%
ANSWERED
, 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 returns than if the PE firm used 100% cash for the following
reasons:
1. By using debt, the PE firm reduces the up-front cash payment for the company, which
boosts returns
2. Using the company's cash flows to repay debt principal and pay debt interest also
produces a better return than keeping the cash flows
3. The PE firm sells the company in the future which allows it to regain the majority of
the funds spent to acquire it in the first place
Why do PE firms use leverage when buying a company? - ANSWERThey use leverage
to increase their returns.
Any debt raised for an LBO is not "your money" - so if you're paying $5 billion for a
company its easier to earn a high return on $2 billion of your own money and $3 billion
borrowed than it is on $5 billion of your own money.
A secondary benefit is that the firm also has more capital available to purchase other
companies.
Walk me through a basic LBO model. - ANSWER"In an LBO model Step 1 is making
assumptions about the purchase price, debt/equity ratio, Interest rate on debt and other
variables; might also assume something about the company's operations such as
revenue growth or margins.
Step 2 is to create a sources & uses section which shows how the transaction is
financed and what the capital is used for, also tells you how much Investor Equity is
required
step 3 is to adjust the company's Balance Sheet for the new Debt and Equity figure,
allocate the purchase price, and add in Goodwill & other Intangibles on the Assets side
to make everything balance
In Step 4, you project out the company's Income Statement, balance Sheet and Cash
Flow statement and determine how much debt is paid off each year based on the
available cash flow and the required interest payments
ANSWERED
, 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 returns than if the PE firm used 100% cash for the following
reasons:
1. By using debt, the PE firm reduces the up-front cash payment for the company, which
boosts returns
2. Using the company's cash flows to repay debt principal and pay debt interest also
produces a better return than keeping the cash flows
3. The PE firm sells the company in the future which allows it to regain the majority of
the funds spent to acquire it in the first place
Why do PE firms use leverage when buying a company? - ANSWERThey use leverage
to increase their returns.
Any debt raised for an LBO is not "your money" - so if you're paying $5 billion for a
company its easier to earn a high return on $2 billion of your own money and $3 billion
borrowed than it is on $5 billion of your own money.
A secondary benefit is that the firm also has more capital available to purchase other
companies.
Walk me through a basic LBO model. - ANSWER"In an LBO model Step 1 is making
assumptions about the purchase price, debt/equity ratio, Interest rate on debt and other
variables; might also assume something about the company's operations such as
revenue growth or margins.
Step 2 is to create a sources & uses section which shows how the transaction is
financed and what the capital is used for, also tells you how much Investor Equity is
required
step 3 is to adjust the company's Balance Sheet for the new Debt and Equity figure,
allocate the purchase price, and add in Goodwill & other Intangibles on the Assets side
to make everything balance
In Step 4, you project out the company's Income Statement, balance Sheet and Cash
Flow statement and determine how much debt is paid off each year based on the
available cash flow and the required interest payments
