12_LEVERAGED BUYOUT (LBO)
MODELS EXAM QUESTIONS &
ANSWERS 2025 (VERIFIED SOLUTION)
, 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 principal
amortization.
12.17 Which of the following numbers does NOT directly impact the Cash Available for
New Debt Repayment - ANSWERPrincipal repayments on new debt.
12.18 What is the MAIN drawback of using the average debt balance to calculate
interest expense - ANSWERDoing so will create a circular reference in the model.
12.19 How do you adjust Shareholders' Equity after an LBO transaction takes place -
ANSWERWipe out the old Shareholders' Equity figure.
12.3 What is the MAIN difference between a normal M&A deal and an LBO that
explains most of the other differences - ANSWERIn an LBO, the private equity firm
always plans to sell the company after a few years.
12.4 What is the LEAST credible sources of returns in a leveraged buyout -
ANSWERMultiple expansion.
12.5 Is it possible to achieve a positive IRR in an LBO if there's no multiple expansion
and no EBITDA growth - ANSWEROnly if a significant amount of debt is used and then
paid off.
12.6 What is the BEST exit strategy for selling a company after a leveraged buyout has
taken place - ANSWERA sale to a "strategic" (a normal company).
12.7 What is the fundamental question in this 7 Days Inn leveraged buyout case study -
ANSWERCan the shift to Managed Hotels offset the decline in occupancy rates across
all hotel segments
12.8 Why do you use options outstanding rather than options exercisable when
calculating the purchase equity value in a deal - ANSWERBecause all options typically
vest upon change of control.
MODELS EXAM QUESTIONS &
ANSWERS 2025 (VERIFIED SOLUTION)
, 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 principal
amortization.
12.17 Which of the following numbers does NOT directly impact the Cash Available for
New Debt Repayment - ANSWERPrincipal repayments on new debt.
12.18 What is the MAIN drawback of using the average debt balance to calculate
interest expense - ANSWERDoing so will create a circular reference in the model.
12.19 How do you adjust Shareholders' Equity after an LBO transaction takes place -
ANSWERWipe out the old Shareholders' Equity figure.
12.3 What is the MAIN difference between a normal M&A deal and an LBO that
explains most of the other differences - ANSWERIn an LBO, the private equity firm
always plans to sell the company after a few years.
12.4 What is the LEAST credible sources of returns in a leveraged buyout -
ANSWERMultiple expansion.
12.5 Is it possible to achieve a positive IRR in an LBO if there's no multiple expansion
and no EBITDA growth - ANSWEROnly if a significant amount of debt is used and then
paid off.
12.6 What is the BEST exit strategy for selling a company after a leveraged buyout has
taken place - ANSWERA sale to a "strategic" (a normal company).
12.7 What is the fundamental question in this 7 Days Inn leveraged buyout case study -
ANSWERCan the shift to Managed Hotels offset the decline in occupancy rates across
all hotel segments
12.8 Why do you use options outstanding rather than options exercisable when
calculating the purchase equity value in a deal - ANSWERBecause all options typically
vest upon change of control.
