Test Bank for LBO Modeling Exam
From Wall Street Prep
Comprehensive Study Guide with 100+ Solved Questions
Prepared by: Study Resource Team
,Table of Contents
1. Part 1: Foundations of LBO Modeling
2. Part 2: Step-by-Step Walkthrough
3. Part 3: 100+ Practice Questions with Solutions
,Part 1: Foundations of LBO Modeling
What is an LBO?
A Leveraged Buyout (LBO) is the acquisition of a company using a significant amount of borrowed
money (leverage) to meet the cost of acquisition. Typically, the assets of the company being
acquired, along with those of the acquiring company, are used as collateral for the loans.
Key Assumptions in LBO Models
1. Purchase Price Assumptions 2. Financing Structure (Debt/Equity split) 3. Operating Assumptions
(Revenue growth, margins) 4. Exit Assumptions (EBITDA multiple, timing) 5. Returns Analysis
(IRR, MOIC)
, Part 3: Practice Questions with Solutions
Q1. Which of the following best describes the key driver of
returns in an LBO?
A) Revenue growth
B) Multiple expansion
C) Leverage & debt paydown
D) Dividend recapitalization
■ Answer: C
Explanation: The defining feature of an LBO is the use of leverage. Debt paydown creates equity
value as cash flow is used to reduce debt, amplifying returns.
Q2. An LBO firm acquires a company for $500m using 60% debt
and 40% equity. EBITDA = $80m, D&A; = $20m, Capex = $10m, WC
= $5m, Interest = $30m. What is Year 1 Free Cash Flow to Equity
(FCFE)?
A) $35m
B) $45m
C) $50m
D) $60m
■ Answer: A
Explanation: EBITDA $80m - D&A; $20m = EBIT $60m. Less interest $30m = EBT $30m. +D&A;
$20m = $50m. -Capex $10m = $40m. -WC $5m = $35m.
Q3. A PE firm buys a company at 8.0x EBITDA for $400m (50%
debt, 50% equity). Exit at 9.0x EBITDA, EBITDA grows from $50m
to $70m in 5 years. Approximate IRR?
A) 12%
B) 18%
C) 22%
D) 28%
■ Answer: B
Explanation: Entry EV=8×50=$400m. Equity=$200m. Exit EV=9×70=$630m. Less debt
$200m=Equity $430m. Multiple=2.15×. Over 5 years → ~18% IRR.
Q4. What is the typical debt repayment priority in an LBO model?
A) Senior debt → Subordinated debt → Mezzanine → Equity
From Wall Street Prep
Comprehensive Study Guide with 100+ Solved Questions
Prepared by: Study Resource Team
,Table of Contents
1. Part 1: Foundations of LBO Modeling
2. Part 2: Step-by-Step Walkthrough
3. Part 3: 100+ Practice Questions with Solutions
,Part 1: Foundations of LBO Modeling
What is an LBO?
A Leveraged Buyout (LBO) is the acquisition of a company using a significant amount of borrowed
money (leverage) to meet the cost of acquisition. Typically, the assets of the company being
acquired, along with those of the acquiring company, are used as collateral for the loans.
Key Assumptions in LBO Models
1. Purchase Price Assumptions 2. Financing Structure (Debt/Equity split) 3. Operating Assumptions
(Revenue growth, margins) 4. Exit Assumptions (EBITDA multiple, timing) 5. Returns Analysis
(IRR, MOIC)
, Part 3: Practice Questions with Solutions
Q1. Which of the following best describes the key driver of
returns in an LBO?
A) Revenue growth
B) Multiple expansion
C) Leverage & debt paydown
D) Dividend recapitalization
■ Answer: C
Explanation: The defining feature of an LBO is the use of leverage. Debt paydown creates equity
value as cash flow is used to reduce debt, amplifying returns.
Q2. An LBO firm acquires a company for $500m using 60% debt
and 40% equity. EBITDA = $80m, D&A; = $20m, Capex = $10m, WC
= $5m, Interest = $30m. What is Year 1 Free Cash Flow to Equity
(FCFE)?
A) $35m
B) $45m
C) $50m
D) $60m
■ Answer: A
Explanation: EBITDA $80m - D&A; $20m = EBIT $60m. Less interest $30m = EBT $30m. +D&A;
$20m = $50m. -Capex $10m = $40m. -WC $5m = $35m.
Q3. A PE firm buys a company at 8.0x EBITDA for $400m (50%
debt, 50% equity). Exit at 9.0x EBITDA, EBITDA grows from $50m
to $70m in 5 years. Approximate IRR?
A) 12%
B) 18%
C) 22%
D) 28%
■ Answer: B
Explanation: Entry EV=8×50=$400m. Equity=$200m. Exit EV=9×70=$630m. Less debt
$200m=Equity $430m. Multiple=2.15×. Over 5 years → ~18% IRR.
Q4. What is the typical debt repayment priority in an LBO model?
A) Senior debt → Subordinated debt → Mezzanine → Equity
