Financeable Prep - LBO Modeling exam practice papers with
reviewed answers
1.What is an LBO? who are they typically executed by? What is the
general timeline for an LBO deal?
(start of Lesson 01: What is an LBO): LBO: An acquisition of a business in
which a meaningful portion of the purchase price is funded by debt
o LBO transactions are typically executed by LBO funds or PE funds
o PE funds by a company using an LBO structure which typically aims
to sell in 5 years to generate returns for investors
2.What do we need to know about investing stage for LBOs? When would
we use one? What types of businesses in terms of stage are we looking for
and why?: o We need to know if the business is early, mid, or late-stage
businesses.
o LBOs are typically for mature businesses or late-stage businesses
because they are more stable and can support the debt used to fund
the LBO transaction
3.What is TEV?: Total Enterprise Value
4.How do work at a big picture view what is the framework for the steps
for an LBO (6 steps)
Give me the first 3 steps with explanations...: 1. Buy the business: EBITDA
times multiple (today)
-EX: $10 x 10x = TEV $100
2. Fund the Purchase: Pull in lenders to fund the deal (EX: 50%) and has
a PE investor we are responsible for finding the rest of the capital
-Now we own the business
3. Generate Cash Flows: This is where we use the CF generated to pay
down debt
5. How do work at a big picture view what is the framework for the steps for
an LBO (6 steps)
Give me the next (last) 3 steps with explanations...: 4. Sell the Business:
Sell the business at the end of the time period and find a buyer. Then
look at EBITDA and the appropriate multiple
,Financeable Prep - LBO Modeling exam practice papers with
reviewed answers
-EX: $12 EBITDA x 10x multiple = $120
5. Pay off debt and collect excess cash: We do not get to collect
anything (like a mortgage) until we pay down debt
,Financeable Prep - LBO Modeling exam practice papers with
reviewed answers
-We generated $30 of CF. Use that do pay down debt.
-No we sold for $120, paid down debt from $50 --> $20 which we still
owe. So currently we have $20 debt and $100 of equity
6. Calculate Returns: Figure out MOIC and IRR. Our equity went from $50
to $100.
-MOIC = 2.0x and IRR = 15%
6.What is MOIC in an LBO?: Multiple of money or multiple of invested
capital... how many dollars came back relative to the amount of dollars
were invested at the outset
7.What is IRR in an LBO?: Internal rate of return: annual return
8.what do we begin with when thinking about starting a LBO model after we
have decided we want to buy the business?: step 2: fund the
purchase...or in other words what are the sources and uses
9.What are the sources and uses in an LBO Model?: Uses: What we need
to get the deal done and get the business
-Purchase of the business (some other components too)
-Always start with uses first in a model, then look at sources
Sources: How we fund those uses
10.What are returns without debt? (simplistic but helpful) If I own a
business worth $100 and it increases to $125 what's my return? If it
decreases to $75?
Assume the $100 is all equity value.: We know that EV = $100
o $125: 25% return
o $75: 25% loss
11.What is the impact of debt on returns? What happens if TEV goes up
to $125 or down to $75 when we have a lender involved (50/50 D/E on
the
transaction of $100). Remember that the business is still going up/down in
value by 25%. We just want to analyze the returns for the PE investor.
Note: LENDERS GET PAID FIRST so investors will not be paid until lenders
are paid because they do not have a higher claim.: o Up to $125: Original
structure was $50 of debt and $50 of equity. Now, debt is 50 and equity
is 75. This is a 50% gain
o Down to $125: Original structure was $50 of debt and $50 of equity.
, Financeable Prep - LBO Modeling exam practice papers with
reviewed answers
Now, debt is 50 and equity is 25. This is a 50% loss.
12.Question to consider...A 10% return seems unexciting. My lender just
offered to fund half of the purchase with only a 5% interest rate. How
does
reviewed answers
1.What is an LBO? who are they typically executed by? What is the
general timeline for an LBO deal?
(start of Lesson 01: What is an LBO): LBO: An acquisition of a business in
which a meaningful portion of the purchase price is funded by debt
o LBO transactions are typically executed by LBO funds or PE funds
o PE funds by a company using an LBO structure which typically aims
to sell in 5 years to generate returns for investors
2.What do we need to know about investing stage for LBOs? When would
we use one? What types of businesses in terms of stage are we looking for
and why?: o We need to know if the business is early, mid, or late-stage
businesses.
o LBOs are typically for mature businesses or late-stage businesses
because they are more stable and can support the debt used to fund
the LBO transaction
3.What is TEV?: Total Enterprise Value
4.How do work at a big picture view what is the framework for the steps
for an LBO (6 steps)
Give me the first 3 steps with explanations...: 1. Buy the business: EBITDA
times multiple (today)
-EX: $10 x 10x = TEV $100
2. Fund the Purchase: Pull in lenders to fund the deal (EX: 50%) and has
a PE investor we are responsible for finding the rest of the capital
-Now we own the business
3. Generate Cash Flows: This is where we use the CF generated to pay
down debt
5. How do work at a big picture view what is the framework for the steps for
an LBO (6 steps)
Give me the next (last) 3 steps with explanations...: 4. Sell the Business:
Sell the business at the end of the time period and find a buyer. Then
look at EBITDA and the appropriate multiple
,Financeable Prep - LBO Modeling exam practice papers with
reviewed answers
-EX: $12 EBITDA x 10x multiple = $120
5. Pay off debt and collect excess cash: We do not get to collect
anything (like a mortgage) until we pay down debt
,Financeable Prep - LBO Modeling exam practice papers with
reviewed answers
-We generated $30 of CF. Use that do pay down debt.
-No we sold for $120, paid down debt from $50 --> $20 which we still
owe. So currently we have $20 debt and $100 of equity
6. Calculate Returns: Figure out MOIC and IRR. Our equity went from $50
to $100.
-MOIC = 2.0x and IRR = 15%
6.What is MOIC in an LBO?: Multiple of money or multiple of invested
capital... how many dollars came back relative to the amount of dollars
were invested at the outset
7.What is IRR in an LBO?: Internal rate of return: annual return
8.what do we begin with when thinking about starting a LBO model after we
have decided we want to buy the business?: step 2: fund the
purchase...or in other words what are the sources and uses
9.What are the sources and uses in an LBO Model?: Uses: What we need
to get the deal done and get the business
-Purchase of the business (some other components too)
-Always start with uses first in a model, then look at sources
Sources: How we fund those uses
10.What are returns without debt? (simplistic but helpful) If I own a
business worth $100 and it increases to $125 what's my return? If it
decreases to $75?
Assume the $100 is all equity value.: We know that EV = $100
o $125: 25% return
o $75: 25% loss
11.What is the impact of debt on returns? What happens if TEV goes up
to $125 or down to $75 when we have a lender involved (50/50 D/E on
the
transaction of $100). Remember that the business is still going up/down in
value by 25%. We just want to analyze the returns for the PE investor.
Note: LENDERS GET PAID FIRST so investors will not be paid until lenders
are paid because they do not have a higher claim.: o Up to $125: Original
structure was $50 of debt and $50 of equity. Now, debt is 50 and equity
is 75. This is a 50% gain
o Down to $125: Original structure was $50 of debt and $50 of equity.
, Financeable Prep - LBO Modeling exam practice papers with
reviewed answers
Now, debt is 50 and equity is 25. This is a 50% loss.
12.Question to consider...A 10% return seems unexciting. My lender just
offered to fund half of the purchase with only a 5% interest rate. How
does
