LBO MODELING EXAM FROM WALL STREET PREP
Test Bank: LBO Modeling
Question 1
A private equity firm is evaluating an LBO of a company with $100M EBITDA.
The purchase price is set at 10x EBITDA, with 60% debt financing. What is the
equity contribution?
A. $400M
B. $600M
C. $1,000M
D. $1,600M
Answer: B. $600M
Rationale: Enterprise Value = $100M × 10 = $1,000M. Debt = 60% → $600M.
Equity = 40% → $400M. Correction: Wait, check carefully — debt financing
covers 60% → $600M debt, so equity = $400M. Correct answer is A. $400M.
Question 2
Which of the following best explains why private equity firms prefer LBOs with
stable cash flow businesses?
A. To maximize top-line revenue growth potential
B. To ensure predictable debt service capability
C. To reduce equity dilution from management rollovers
D. To achieve faster working capital turnover
,Answer: B. To ensure predictable debt service capability
Rationale: Stable cash flow ensures the company can service debt, which is
critical in leveraged buyouts.
Question 3
A company is acquired in an LBO for $500M. It generates $50M FCF annually, all
of which goes to debt repayment. If debt is $300M at acquisition, how many years
until the debt is fully repaid (ignoring interest)?
A. 5 years
B. 6 years
C. 7 years
D. 10 years
Answer: B. 6 years
Rationale: $300M ÷ $50M = 6 years.
Question 4
At exit, an LBO investor achieves a 2.5x MOIC over 5 years. What is the
approximate IRR?
A. 15%
B. 20%
C. 25%
D. 30%
,Answer: C. 25%
Rationale: A 2.5x return in 5 years is ~25% IRR (rule of thumb: 2x in 5 years ≈
15%, 3x ≈ 25%).
Question 5
When building an LBO model, which step logically comes first?
A. Projecting the exit value
B. Constructing the debt schedule
C. Laying out sources & uses of funds
D. Building the sensitivity analysis
Answer: C. Laying out sources & uses of funds
Rationale: First step is determining how the acquisition is financed (sources/uses).
Question 6
A PE firm targets a minimum IRR of 20%. If the model shows an IRR of 17%,
which is the most appropriate action?
A. Increase the entry purchase price
B. Reduce leverage in the structure
C. Adjust assumptions to improve operating performance
D. Extend the holding period
Answer: C. Adjust assumptions to improve operating performance
, Rationale: To improve IRR, you either reduce purchase price, improve operating
assumptions, or shorten holding. Increasing purchase price or reducing leverage
worsens returns.
Question 7
In an LBO, “cash sweep” refers to:
A. Using excess cash flow to repay debt ahead of schedule
B. The process of refinancing all tranches of debt at once
C. Distributing all cash flow as dividends to equity holders
D. Collecting customer receivables faster
Answer: A. Using excess cash flow to repay debt ahead of schedule
Question 8
Why is the exit multiple assumption a major sensitivity driver in LBO models?
A. It directly impacts the equity IRR
B. It determines the debt/EBITDA ratio
C. It controls working capital build-up
D. It dictates interest expense forecasting
Answer: A. It directly impacts the equity IRR
Rationale: The exit multiple sets the terminal enterprise value, which largely
drives equity returns.
Test Bank: LBO Modeling
Question 1
A private equity firm is evaluating an LBO of a company with $100M EBITDA.
The purchase price is set at 10x EBITDA, with 60% debt financing. What is the
equity contribution?
A. $400M
B. $600M
C. $1,000M
D. $1,600M
Answer: B. $600M
Rationale: Enterprise Value = $100M × 10 = $1,000M. Debt = 60% → $600M.
Equity = 40% → $400M. Correction: Wait, check carefully — debt financing
covers 60% → $600M debt, so equity = $400M. Correct answer is A. $400M.
Question 2
Which of the following best explains why private equity firms prefer LBOs with
stable cash flow businesses?
A. To maximize top-line revenue growth potential
B. To ensure predictable debt service capability
C. To reduce equity dilution from management rollovers
D. To achieve faster working capital turnover
,Answer: B. To ensure predictable debt service capability
Rationale: Stable cash flow ensures the company can service debt, which is
critical in leveraged buyouts.
Question 3
A company is acquired in an LBO for $500M. It generates $50M FCF annually, all
of which goes to debt repayment. If debt is $300M at acquisition, how many years
until the debt is fully repaid (ignoring interest)?
A. 5 years
B. 6 years
C. 7 years
D. 10 years
Answer: B. 6 years
Rationale: $300M ÷ $50M = 6 years.
Question 4
At exit, an LBO investor achieves a 2.5x MOIC over 5 years. What is the
approximate IRR?
A. 15%
B. 20%
C. 25%
D. 30%
,Answer: C. 25%
Rationale: A 2.5x return in 5 years is ~25% IRR (rule of thumb: 2x in 5 years ≈
15%, 3x ≈ 25%).
Question 5
When building an LBO model, which step logically comes first?
A. Projecting the exit value
B. Constructing the debt schedule
C. Laying out sources & uses of funds
D. Building the sensitivity analysis
Answer: C. Laying out sources & uses of funds
Rationale: First step is determining how the acquisition is financed (sources/uses).
Question 6
A PE firm targets a minimum IRR of 20%. If the model shows an IRR of 17%,
which is the most appropriate action?
A. Increase the entry purchase price
B. Reduce leverage in the structure
C. Adjust assumptions to improve operating performance
D. Extend the holding period
Answer: C. Adjust assumptions to improve operating performance
, Rationale: To improve IRR, you either reduce purchase price, improve operating
assumptions, or shorten holding. Increasing purchase price or reducing leverage
worsens returns.
Question 7
In an LBO, “cash sweep” refers to:
A. Using excess cash flow to repay debt ahead of schedule
B. The process of refinancing all tranches of debt at once
C. Distributing all cash flow as dividends to equity holders
D. Collecting customer receivables faster
Answer: A. Using excess cash flow to repay debt ahead of schedule
Question 8
Why is the exit multiple assumption a major sensitivity driver in LBO models?
A. It directly impacts the equity IRR
B. It determines the debt/EBITDA ratio
C. It controls working capital build-up
D. It dictates interest expense forecasting
Answer: A. It directly impacts the equity IRR
Rationale: The exit multiple sets the terminal enterprise value, which largely
drives equity returns.
