Financial Modeling Final Exam
1. What is an LBO?
Answer A LBO is a leveraged buyout where a private equity firm purchases a company, funded with a significant
amount of debt, based on a multiple of EBITDA.
2. Walk me through an LBO.
Answer 1. Purchase a company using an EV/EBITDA multiple
2. Finance the purchase with debt & equity (majority debt)
3. Collects the CFs that can be used to pay down the new debt
4. Sell the business @same multiple but @ (hopefully) higher EBITDA
5. Pay ott the debt (used to finance the purchase) and keep the remainder
6. Assess the MOIC and IRR of the investment
3. What are LBO value creation drivers?
Answer 1. Purchase Price (driven by EBITDA & EBITDA multiple)
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, 2. Level of debt you can raise (more debt means less $ sponsor has to contribute which can increase returns)
3. CFs generated by the business
4. Interest % on the debt (higher % = lower CFs)
5. Sale Price (function of EBITDA and EBITDA multiple)
4. What are the CORE LBO value creation drivers?
Answer 1. The EBITDA multiple we pay which attects the purchase price
2. The CFs with business generates which drives paydown
3. The growth of EBITDA which drives the exit value/sale price
5. What can you use free cash flow for?
Answer 1. M&A
2. Pay dividends
3. Buy back shares
4. Pay down debt
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1. What is an LBO?
Answer A LBO is a leveraged buyout where a private equity firm purchases a company, funded with a significant
amount of debt, based on a multiple of EBITDA.
2. Walk me through an LBO.
Answer 1. Purchase a company using an EV/EBITDA multiple
2. Finance the purchase with debt & equity (majority debt)
3. Collects the CFs that can be used to pay down the new debt
4. Sell the business @same multiple but @ (hopefully) higher EBITDA
5. Pay ott the debt (used to finance the purchase) and keep the remainder
6. Assess the MOIC and IRR of the investment
3. What are LBO value creation drivers?
Answer 1. Purchase Price (driven by EBITDA & EBITDA multiple)
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, 2. Level of debt you can raise (more debt means less $ sponsor has to contribute which can increase returns)
3. CFs generated by the business
4. Interest % on the debt (higher % = lower CFs)
5. Sale Price (function of EBITDA and EBITDA multiple)
4. What are the CORE LBO value creation drivers?
Answer 1. The EBITDA multiple we pay which attects the purchase price
2. The CFs with business generates which drives paydown
3. The growth of EBITDA which drives the exit value/sale price
5. What can you use free cash flow for?
Answer 1. M&A
2. Pay dividends
3. Buy back shares
4. Pay down debt
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