LBO Modeling Exam from
Wall Street Prep with
verified answer
, What is an LBO? - CORRECT ANSWERS -A leveraged buyout is the acquisition of a
company using debt instruments as the majority of the purchase price.
Pros:
1. Valuation is realistic as it does not require synergies to achieve.
Cons:
1. Ignoring synergies could result in an underestimated valuation.
2. Very sensitive to operating (growth rate, margins, etc) and financial (multiples)
assumptions.
Why would you use leverage when buying a company? - CORRECT ANSWERS -To
boost the investor's return.
The less of their own capital is invested, the easier it is to earn a higher return.
Another benefit is that the investor also has more capital available to purchase other
companies because they've used leverage.
What variables impact an LBO model the most? - CORRECT ANSWERS -1. Purchase
and exit multiples have the biggest impact on the returns of a model.
2. The amount of leverage (debt) used also has a significant impact.
3. Operational characteristics such as revenue growth and EBITDA margins.
How do you pick purchase multiples and exit multiples in an LBO model? - CORRECT
ANSWERS -You look at the range of multiples for similar LBO transactions of
comparable companies, and choose the multiples appropriate for your situation.
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.
What is an "ideal" candidate for an LBO? - CORRECT ANSWERS -"Ideal" candidates
have:
1. Stable and predictable cash flows
2. Low-risk businesses
3. Not much need for ongoing investments such as CapEx
4. Opportunities for expense reductions to boost their margins
5. A strong management team
6. A base of assets to use as collateral for debt
Wall Street Prep with
verified answer
, What is an LBO? - CORRECT ANSWERS -A leveraged buyout is the acquisition of a
company using debt instruments as the majority of the purchase price.
Pros:
1. Valuation is realistic as it does not require synergies to achieve.
Cons:
1. Ignoring synergies could result in an underestimated valuation.
2. Very sensitive to operating (growth rate, margins, etc) and financial (multiples)
assumptions.
Why would you use leverage when buying a company? - CORRECT ANSWERS -To
boost the investor's return.
The less of their own capital is invested, the easier it is to earn a higher return.
Another benefit is that the investor also has more capital available to purchase other
companies because they've used leverage.
What variables impact an LBO model the most? - CORRECT ANSWERS -1. Purchase
and exit multiples have the biggest impact on the returns of a model.
2. The amount of leverage (debt) used also has a significant impact.
3. Operational characteristics such as revenue growth and EBITDA margins.
How do you pick purchase multiples and exit multiples in an LBO model? - CORRECT
ANSWERS -You look at the range of multiples for similar LBO transactions of
comparable companies, and choose the multiples appropriate for your situation.
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.
What is an "ideal" candidate for an LBO? - CORRECT ANSWERS -"Ideal" candidates
have:
1. Stable and predictable cash flows
2. Low-risk businesses
3. Not much need for ongoing investments such as CapEx
4. Opportunities for expense reductions to boost their margins
5. A strong management team
6. A base of assets to use as collateral for debt
