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LBO MODELING EXAM FROM WALL STREET (VERSION 1& 2) LATEST 2025
ACTUAL EXAM WITH COMPLETE QUESTIONS AND CORRECT DETAILED
ANSWERS (100% VERIFIED ANSWERS) |ALREADY GRADED A+| ||PROFESSOR
VERIFIED|| ||BRANDNEW!!!||
What is the difference between bank debt and high yield debt? -
ANSWER-High yield debt tends to have higher interest rates than
bank debt since its riskier for investors
High yield debt interest rates are usually fixed; whereas bank
debt interest rates are floating and they depend on LIBOR
High yield debt has incurrence covenants while bank debt
has maintenance covenants. Incurrence covenants prevent
you from doing something (e.g. selling an asset or building a
factory) while maintenance covenants require that you
maintain a minimum financial performance (for example, total
debt/EBITDA must be below 5x at all times)
Bank debt is usually amortized --- the principal must be paid off
over time -- whereas, the high yield debt principal is due at the
end (bullet maturity) and early principal repayments are not
allowed
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If High-Yield Debt is "riskier," why are early principal repayments
not allowed? Shouldn't investors want to reduce their risk? -
ANSWER-Investors need to be compensated for the risk they
take. Think about what happens if early repayments are allowed:
-Initially, the investors might earn $100mm in interest on $1bil in
debt at a 10% interest rate
-Without early repayment, the investors keep getting that $100
mm in interest per year paid directly to them
-With early repayment, the interest payment drops each year and
the investors receive increasingly less each year, which drops
their effective return
Why might you use bank debt rather than high-yield debt in an
LBO? - ANSWER-If the PE firm is concerned about the company
making its interest payments and wants a lower-cost option they
may use bank debt.
May also use bank debt if they have CapEx/expansion plans and
do not want the company to be restricted by incurrence covenants
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Why would a PE firm prefer high-yield debt instead? - ANSWER-If
the PE firm intends to refinance its debt or believes its returns are
not as sensitive to interest payments, then it may use high yield
debt.
They may also use it if they do not have expansion plans or
plans to sell of any assets
How does refinancing versus assuming debt work in an LBO
model? - ANSWER-If it assumes the debt, the debt shows up on
the BS and must be paid off. It has no net effect on the funds
required to buy the company. Shows up in both columns of the
sources and uses table.
If it refinances the debt, it pays it off, usually replacing it with new
debt used to acquire the company. This means that additional
funds are required, so the effective purchase price goes down. In
this case, the existing debt only shows up in the uses column
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How do transaction and financing fees factor into the LBO model?
- ANSWER-Pay for all these upfront in cash but the accounting
treatment is different:
- legal & advisory fees: come out of cash and RE immediately
after the transaction closes
- financing fees: amortized over time (for as long as debt remains
outstanding), very similar to how CapEx and PPE work: you pay
for them upfront in cash, create a new asset on the BS, and
reduce the value over time as fees are recognized on the IS
What's the point of assuming a minimum cash balance in an
LBO? - ANSWER-the point is so the company cannot use 100%
of its cash flow to repay the debt each year -- it always needs to
maintain a min cash balance to pay employees, pay for GS&A,
and so on
So you normally set assumptions such that any extra cash flow
beyond its min cash balance is used to pay debt
LBO MODELING EXAM FROM WALL STREET (VERSION 1& 2) LATEST 2025
ACTUAL EXAM WITH COMPLETE QUESTIONS AND CORRECT DETAILED
ANSWERS (100% VERIFIED ANSWERS) |ALREADY GRADED A+| ||PROFESSOR
VERIFIED|| ||BRANDNEW!!!||
What is the difference between bank debt and high yield debt? -
ANSWER-High yield debt tends to have higher interest rates than
bank debt since its riskier for investors
High yield debt interest rates are usually fixed; whereas bank
debt interest rates are floating and they depend on LIBOR
High yield debt has incurrence covenants while bank debt
has maintenance covenants. Incurrence covenants prevent
you from doing something (e.g. selling an asset or building a
factory) while maintenance covenants require that you
maintain a minimum financial performance (for example, total
debt/EBITDA must be below 5x at all times)
Bank debt is usually amortized --- the principal must be paid off
over time -- whereas, the high yield debt principal is due at the
end (bullet maturity) and early principal repayments are not
allowed
,2|Page
If High-Yield Debt is "riskier," why are early principal repayments
not allowed? Shouldn't investors want to reduce their risk? -
ANSWER-Investors need to be compensated for the risk they
take. Think about what happens if early repayments are allowed:
-Initially, the investors might earn $100mm in interest on $1bil in
debt at a 10% interest rate
-Without early repayment, the investors keep getting that $100
mm in interest per year paid directly to them
-With early repayment, the interest payment drops each year and
the investors receive increasingly less each year, which drops
their effective return
Why might you use bank debt rather than high-yield debt in an
LBO? - ANSWER-If the PE firm is concerned about the company
making its interest payments and wants a lower-cost option they
may use bank debt.
May also use bank debt if they have CapEx/expansion plans and
do not want the company to be restricted by incurrence covenants
,3|Page
Why would a PE firm prefer high-yield debt instead? - ANSWER-If
the PE firm intends to refinance its debt or believes its returns are
not as sensitive to interest payments, then it may use high yield
debt.
They may also use it if they do not have expansion plans or
plans to sell of any assets
How does refinancing versus assuming debt work in an LBO
model? - ANSWER-If it assumes the debt, the debt shows up on
the BS and must be paid off. It has no net effect on the funds
required to buy the company. Shows up in both columns of the
sources and uses table.
If it refinances the debt, it pays it off, usually replacing it with new
debt used to acquire the company. This means that additional
funds are required, so the effective purchase price goes down. In
this case, the existing debt only shows up in the uses column
, 4|Page
How do transaction and financing fees factor into the LBO model?
- ANSWER-Pay for all these upfront in cash but the accounting
treatment is different:
- legal & advisory fees: come out of cash and RE immediately
after the transaction closes
- financing fees: amortized over time (for as long as debt remains
outstanding), very similar to how CapEx and PPE work: you pay
for them upfront in cash, create a new asset on the BS, and
reduce the value over time as fees are recognized on the IS
What's the point of assuming a minimum cash balance in an
LBO? - ANSWER-the point is so the company cannot use 100%
of its cash flow to repay the debt each year -- it always needs to
maintain a min cash balance to pay employees, pay for GS&A,
and so on
So you normally set assumptions such that any extra cash flow
beyond its min cash balance is used to pay debt
