LBO MODEL BREAKING INTO WALL
STREET EXAM QUESTIONS AND
CORRECT ANSWERS | VERIFIED 2025
All of the following could show up as adjustments to the
Income Statement as a result of a LBO analysis EXCEPT:
a. Cost savings
b. Additional amortization expense
c. Additional interest expense
d. Additional depreciation expense
e. False and misleading question - all of these could show
up as
adjustments Correct Answer Explanation: The Correct
Answer choice is E. All of the answer
choices constitute adjustments made to the income
statement during an LBO analysis. Answer choice A would
represent a decrease in annual COGS expense or SG&A
(e.g. if the PE firm decides to cut spending or lay off
employees). Answer choice B represents not only
additional amortization from newly created Intangible
Assets, but also annual amortization for Capitalized
Financing Fees (which gets created as an asset on the
balance sheet). Answer choice C represents all the cash
interest (as well as PIK interest) that needs to be paid on
,all the new debt issued as part of the LBO. Answer choice
D represents the write-ups to fair market value of PP&E
and the additional incremental depreciation associated
with them.
How is the process of adjusting the Balance Sheet
different in an LBO model, compared to what you might
see in a typical merger model?
a. In an LBO model, the Shareholders' Equity gets wiped
out and replaced with new equity from the PE firm, but in a
merger model the seller's Shareholders' Equity disappears
altogether
b. You'll typically add more tranches of Debt to the
Balance Sheet in an LBO model than you will in a merger
model
c. In an LBO model, you combine two companies' Balance
Sheets to reflect the PE firm and the acquired company,
but in a merger model you must make adjustments first
d. None of the above Correct Answer Explanation: A is
definitely true and is exactly as stated:
Shareholders' Equity gets wiped out in both deal types, but
in a merger model it stays wiped out since the seller is no
longer an independent entity, but in an LBO model it gets
replaced with the PE firm's new equity (common equity,
Preferred Stock, and anything else that goes in that
section). B is also true because while debt is often used in
a merger model (and M&A deals in general), there are
, typically more tranches of debt in a leveraged buyout. C is
incorrect because you never combine the PE firm's own
"Balance Sheet" with the target company it acquires. You
"make adjustments" in both types of models, but the
difference is that in an LBO model, you don't combine the
Balance Sheets of two companies because it's a single
company being bought out.
Which of the following statements are TRUE regarding
why Capitalized Financing Fees are considered an Asset?
a. They are similar to Prepaid Expenses
b. Because they are paid for in cash up-front and then
recognized as an
Income Statement expense over the years
c. They are an Asset because, similar to other non-cash
charges, they may
save the company on taxes
d. They are a "plug" in an LBO model to make the Balance
Sheet balance Correct Answer Explanation: The Correct
Answer choices are A, B, and C.
Capitalized Financing Fees are similar to Prepaid
Expenses and also similar to how PP&E is treated on the
Balance Sheet. The expense is paid up-front in cash and
then 'capitalized' on the Balance Sheet as an Asset. Then
each period the expense is recognized on the Income
Statement, similar to how PP&E is depreciated over time.
The other reason they are considered an Asset is because
STREET EXAM QUESTIONS AND
CORRECT ANSWERS | VERIFIED 2025
All of the following could show up as adjustments to the
Income Statement as a result of a LBO analysis EXCEPT:
a. Cost savings
b. Additional amortization expense
c. Additional interest expense
d. Additional depreciation expense
e. False and misleading question - all of these could show
up as
adjustments Correct Answer Explanation: The Correct
Answer choice is E. All of the answer
choices constitute adjustments made to the income
statement during an LBO analysis. Answer choice A would
represent a decrease in annual COGS expense or SG&A
(e.g. if the PE firm decides to cut spending or lay off
employees). Answer choice B represents not only
additional amortization from newly created Intangible
Assets, but also annual amortization for Capitalized
Financing Fees (which gets created as an asset on the
balance sheet). Answer choice C represents all the cash
interest (as well as PIK interest) that needs to be paid on
,all the new debt issued as part of the LBO. Answer choice
D represents the write-ups to fair market value of PP&E
and the additional incremental depreciation associated
with them.
How is the process of adjusting the Balance Sheet
different in an LBO model, compared to what you might
see in a typical merger model?
a. In an LBO model, the Shareholders' Equity gets wiped
out and replaced with new equity from the PE firm, but in a
merger model the seller's Shareholders' Equity disappears
altogether
b. You'll typically add more tranches of Debt to the
Balance Sheet in an LBO model than you will in a merger
model
c. In an LBO model, you combine two companies' Balance
Sheets to reflect the PE firm and the acquired company,
but in a merger model you must make adjustments first
d. None of the above Correct Answer Explanation: A is
definitely true and is exactly as stated:
Shareholders' Equity gets wiped out in both deal types, but
in a merger model it stays wiped out since the seller is no
longer an independent entity, but in an LBO model it gets
replaced with the PE firm's new equity (common equity,
Preferred Stock, and anything else that goes in that
section). B is also true because while debt is often used in
a merger model (and M&A deals in general), there are
, typically more tranches of debt in a leveraged buyout. C is
incorrect because you never combine the PE firm's own
"Balance Sheet" with the target company it acquires. You
"make adjustments" in both types of models, but the
difference is that in an LBO model, you don't combine the
Balance Sheets of two companies because it's a single
company being bought out.
Which of the following statements are TRUE regarding
why Capitalized Financing Fees are considered an Asset?
a. They are similar to Prepaid Expenses
b. Because they are paid for in cash up-front and then
recognized as an
Income Statement expense over the years
c. They are an Asset because, similar to other non-cash
charges, they may
save the company on taxes
d. They are a "plug" in an LBO model to make the Balance
Sheet balance Correct Answer Explanation: The Correct
Answer choices are A, B, and C.
Capitalized Financing Fees are similar to Prepaid
Expenses and also similar to how PP&E is treated on the
Balance Sheet. The expense is paid up-front in cash and
then 'capitalized' on the Balance Sheet as an Asset. Then
each period the expense is recognized on the Income
Statement, similar to how PP&E is depreciated over time.
The other reason they are considered an Asset is because
