LBO MODELS CONCEPTS +
CALCULATIONS
1. what is an lbo and why does it work
Answer -PE firm acquires a firm using a mix of debt and equity, operates it for several years and sells
it at end of period to earn a rturn.
-uses cimpany's CF to pay for interest expense on debt and repay debt principle
2. why do lbos work
Answer leverage amplifies returns. also has risks bc returns could be even worse
3. FCF for PE
Answer -pure lfcf alr accounts for fcf after paying back principal repayments and debt (net change in debt)
-this one shows u how much fcf u have to pay back principal
-ufcf dosent pay back interest rate (NOPAT). want fcf to see what it is after u pay back int. rate
- U NEED LBO FCF To see how much cash flow to pay back PRINICIPAL after paying back INTEREST EXPENSES
4. why does leverage amplifies returns
1/
23
,Answer think percent u earn back on ur equity is higher the more debt u use.
5. how does a firm create economic value
Answer WHEN THE ROIC IS HIGHER THAN THE WACC
6. walk me through an lbo model (guggenheim asked to explain the key levers
behind an lbo use this as ur guiding response
Answer -make assumptions for purchase price, debt, and equity, int. rate on debt, and other drivers
such as the company's revenue growth and margins
-create sources and uses schedule to show much investor equity the pe firm contributes + how transaction fees and
company's cash balance attect this contribution
-project company's income statement and partial cash flow statement down to fcf.
-use use fcf, beggining cash, and minimum cash to determine how much debt principal the company repays each yr..
link int. expense on this changing debt balance to the income st. so that fcf deducts the interest.
-make exit calculations based on assumed ebitda exit multiple and calculate the irr and MOM multiple based on
proceeds pe firm earns at end vs. investor equity in beggining.
7. what assumptions impact an LBO the most
2/
23
, Answer -purhcase price and exit assumptions (usually based on ebitda multiples)-->lower purhcase
multiple is higher returns and higher exit multiple results in higher returns
-then the debt used (based on % of purchase price or a multiple of the initial ebitda) makes the biggest impact. more
LEVERAGE AMPLIFIES PERFORMANCE but could also worsen if things go wrong
-company's revenue growth, ebitda margins, and cash flow profile influence exit proceeds and debt repaid in the
holding period.
-less sigificant but still-->int. rates, principal repayments, and other items attached to debt may make a ditterence
8. how do u select purchase multiple and exit multiple in an lbo model
Answer -public companies
assume share price premimum and check implied purchase multiple against stand. val. methodologies to ensure its
reasonable
3/
23
CALCULATIONS
1. what is an lbo and why does it work
Answer -PE firm acquires a firm using a mix of debt and equity, operates it for several years and sells
it at end of period to earn a rturn.
-uses cimpany's CF to pay for interest expense on debt and repay debt principle
2. why do lbos work
Answer leverage amplifies returns. also has risks bc returns could be even worse
3. FCF for PE
Answer -pure lfcf alr accounts for fcf after paying back principal repayments and debt (net change in debt)
-this one shows u how much fcf u have to pay back principal
-ufcf dosent pay back interest rate (NOPAT). want fcf to see what it is after u pay back int. rate
- U NEED LBO FCF To see how much cash flow to pay back PRINICIPAL after paying back INTEREST EXPENSES
4. why does leverage amplifies returns
1/
23
,Answer think percent u earn back on ur equity is higher the more debt u use.
5. how does a firm create economic value
Answer WHEN THE ROIC IS HIGHER THAN THE WACC
6. walk me through an lbo model (guggenheim asked to explain the key levers
behind an lbo use this as ur guiding response
Answer -make assumptions for purchase price, debt, and equity, int. rate on debt, and other drivers
such as the company's revenue growth and margins
-create sources and uses schedule to show much investor equity the pe firm contributes + how transaction fees and
company's cash balance attect this contribution
-project company's income statement and partial cash flow statement down to fcf.
-use use fcf, beggining cash, and minimum cash to determine how much debt principal the company repays each yr..
link int. expense on this changing debt balance to the income st. so that fcf deducts the interest.
-make exit calculations based on assumed ebitda exit multiple and calculate the irr and MOM multiple based on
proceeds pe firm earns at end vs. investor equity in beggining.
7. what assumptions impact an LBO the most
2/
23
, Answer -purhcase price and exit assumptions (usually based on ebitda multiples)-->lower purhcase
multiple is higher returns and higher exit multiple results in higher returns
-then the debt used (based on % of purchase price or a multiple of the initial ebitda) makes the biggest impact. more
LEVERAGE AMPLIFIES PERFORMANCE but could also worsen if things go wrong
-company's revenue growth, ebitda margins, and cash flow profile influence exit proceeds and debt repaid in the
holding period.
-less sigificant but still-->int. rates, principal repayments, and other items attached to debt may make a ditterence
8. how do u select purchase multiple and exit multiple in an lbo model
Answer -public companies
assume share price premimum and check implied purchase multiple against stand. val. methodologies to ensure its
reasonable
3/
23
