LBO Modeling, M&A Modeling and
Transaction Comps – Wall Street Prep –
2025/2026 Edition – Verified Exam Bundle
with Correct Answers
Section 1: LBO Fundamentals (Q1–Q25)
1. What is a Leveraged Buyout (LBO)?
A. A merger of two equal-sized companies
B. An acquisition largely financed with debt, where the target's cash flows service
the debt
C. A hostile takeover using only equity financing
D. A divestiture of a subsidiary to its management
Answer: B
Rationale: An LBO is a financial transaction where a company is acquired using a
significant amount of borrowed funds, and the acquired company's cash flows are
used to service the debt over time .
2. Why would a private equity firm use leverage when buying a company?
A. To reduce the risk of bankruptcy
B. To increase the amount of equity required
C. To boost return on equity because debt is not "your money"
D. To eliminate the need for a management team
Answer: C
Rationale: Leverage amplifies returns on equity because the amount of capital
invested by the PE firm is reduced. For a $5 billion company, it is easier to earn a
high return on $2 billion of equity and $3 billion of debt than on $3 billion of
equity and $2 billion of debt .
3. Which of the following is NOT a characteristic of a good LBO candidate?
A. Stable and predictable cash flows
B. Low capital expenditure requirements
,C. High volatility in earnings
D. Strong management team
Answer: C
Rationale: PE firms seek companies with stable, predictable cash flows to service
debt. High volatility in earnings makes it difficult to reliably service debt
obligations .
4. What are the primary components of an LBO model?
A. Revenue projections only
B. Transaction structure, financial projections, debt financing, cash flow analysis,
and exit strategy
C. Tax calculations and depreciation schedules
D. Marketing and sales forecasts
Answer: B
Rationale: An LBO model includes: transaction structure (sources and uses),
financial projections (revenue, expenses, capex, working capital), debt financing
(types and amounts), cash flow analysis (FCF for debt servicing), and exit strategy
(exit value and multiple) .
5. In an LBO model, what is the primary purpose of the Sources & Uses table?
A. To forecast future revenue growth
B. To show how the transaction is financed (Sources) and where the capital is
spent (Uses)
C. To calculate the company's WACC
D. To determine the target's historical EBITDA margin
Answer: B
Rationale: The Sources & Uses table reconciles total funding (e.g., equity, debt)
with total expenditures (e.g., equity purchase price, fees, refinancing existing
debt), ensuring the deal balances .
6. Which of the following is typically included in the "Uses" section of an LBO
model?
A. Proceeds from new Term Loan B
B. Sponsor equity contribution
,C. Refinancing of existing target debt
D. Interest income from cash
Answer: C
Rationale: "Uses" include the equity purchase price, transaction fees, and
repayment of the target's existing debt. Sources include new debt and sponsor
equity .
7. What is the correct formula for calculating Enterprise Value (EV) at acquisition
in an LBO?
A. Equity Purchase Price + Cash
B. Equity Purchase Price - Net Debt
C. Equity Purchase Price + Net Debt
D. EBITDA × Entry Multiple + Cash
Answer: C
Rationale: EV = Equity Value + Net Debt (Debt - Cash). At acquisition, EV also
equals EBITDA × Entry Multiple .
8. In purchase price allocation (PPA), how is goodwill calculated?
A. Total Assets - Total Liabilities
B. Fair Value of Identifiable Net Assets - Purchase Price
C. Purchase Price - Fair Value of Identifiable Net Assets
D. EBITDA × Exit Multiple
Answer: C
Rationale: Goodwill = Purchase Price - Fair Value of Identifiable Net Assets. It
represents the premium paid above the fair value of the target's net assets .
9. What is the formula for calculating IRR in an LBO?
A. (Exit Equity Value / Entry Equity Value)^(1/n) - 1
B. Exit Equity Value - Entry Equity Value
C. Exit Equity Value / Entry Equity Value
D. Entry Equity Value / Exit Equity Value
Answer: A
Rationale: IRR = (Exit Equity Value / Entry Equity Value)^(1/n) - 1, where n is the
number of years the investment is held .
, 10. What is a "cash-on-cash" return in an LBO?
A. The total cash returned divided by the total cash invested
B. The IRR
C. The EBITDA multiple
D. The WACC
Answer: A
Rationale: Cash-on-cash return = Total Cash Returned / Total Cash Invested. It
measures the multiple of invested capital returned to investors .
11. Which metric is MOST commonly used to size debt in an LBO transaction?
A. Net Income
B. Free Cash Flow to Equity
C. EBITDA
D. Revenue
Answer: C
Rationale: Leverage is expressed as a multiple of EBITDA (e.g., 5.0x–6.0x Total
Debt / EBITDA). EBITDA approximates operating cash available to service debt .
12. What is the leverage ratio (Total Debt / EBITDA) in a typical middle-market
LBO?
A. 1x
B. 4x–6x
C. 10x
D. 12x
Answer: B
Rationale: Most lenders are comfortable with leverage in the 4x–6x range
depending on cash flow stability and industry dynamics .
**13. 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
Transaction Comps – Wall Street Prep –
2025/2026 Edition – Verified Exam Bundle
with Correct Answers
Section 1: LBO Fundamentals (Q1–Q25)
1. What is a Leveraged Buyout (LBO)?
A. A merger of two equal-sized companies
B. An acquisition largely financed with debt, where the target's cash flows service
the debt
C. A hostile takeover using only equity financing
D. A divestiture of a subsidiary to its management
Answer: B
Rationale: An LBO is a financial transaction where a company is acquired using a
significant amount of borrowed funds, and the acquired company's cash flows are
used to service the debt over time .
2. Why would a private equity firm use leverage when buying a company?
A. To reduce the risk of bankruptcy
B. To increase the amount of equity required
C. To boost return on equity because debt is not "your money"
D. To eliminate the need for a management team
Answer: C
Rationale: Leverage amplifies returns on equity because the amount of capital
invested by the PE firm is reduced. For a $5 billion company, it is easier to earn a
high return on $2 billion of equity and $3 billion of debt than on $3 billion of
equity and $2 billion of debt .
3. Which of the following is NOT a characteristic of a good LBO candidate?
A. Stable and predictable cash flows
B. Low capital expenditure requirements
,C. High volatility in earnings
D. Strong management team
Answer: C
Rationale: PE firms seek companies with stable, predictable cash flows to service
debt. High volatility in earnings makes it difficult to reliably service debt
obligations .
4. What are the primary components of an LBO model?
A. Revenue projections only
B. Transaction structure, financial projections, debt financing, cash flow analysis,
and exit strategy
C. Tax calculations and depreciation schedules
D. Marketing and sales forecasts
Answer: B
Rationale: An LBO model includes: transaction structure (sources and uses),
financial projections (revenue, expenses, capex, working capital), debt financing
(types and amounts), cash flow analysis (FCF for debt servicing), and exit strategy
(exit value and multiple) .
5. In an LBO model, what is the primary purpose of the Sources & Uses table?
A. To forecast future revenue growth
B. To show how the transaction is financed (Sources) and where the capital is
spent (Uses)
C. To calculate the company's WACC
D. To determine the target's historical EBITDA margin
Answer: B
Rationale: The Sources & Uses table reconciles total funding (e.g., equity, debt)
with total expenditures (e.g., equity purchase price, fees, refinancing existing
debt), ensuring the deal balances .
6. Which of the following is typically included in the "Uses" section of an LBO
model?
A. Proceeds from new Term Loan B
B. Sponsor equity contribution
,C. Refinancing of existing target debt
D. Interest income from cash
Answer: C
Rationale: "Uses" include the equity purchase price, transaction fees, and
repayment of the target's existing debt. Sources include new debt and sponsor
equity .
7. What is the correct formula for calculating Enterprise Value (EV) at acquisition
in an LBO?
A. Equity Purchase Price + Cash
B. Equity Purchase Price - Net Debt
C. Equity Purchase Price + Net Debt
D. EBITDA × Entry Multiple + Cash
Answer: C
Rationale: EV = Equity Value + Net Debt (Debt - Cash). At acquisition, EV also
equals EBITDA × Entry Multiple .
8. In purchase price allocation (PPA), how is goodwill calculated?
A. Total Assets - Total Liabilities
B. Fair Value of Identifiable Net Assets - Purchase Price
C. Purchase Price - Fair Value of Identifiable Net Assets
D. EBITDA × Exit Multiple
Answer: C
Rationale: Goodwill = Purchase Price - Fair Value of Identifiable Net Assets. It
represents the premium paid above the fair value of the target's net assets .
9. What is the formula for calculating IRR in an LBO?
A. (Exit Equity Value / Entry Equity Value)^(1/n) - 1
B. Exit Equity Value - Entry Equity Value
C. Exit Equity Value / Entry Equity Value
D. Entry Equity Value / Exit Equity Value
Answer: A
Rationale: IRR = (Exit Equity Value / Entry Equity Value)^(1/n) - 1, where n is the
number of years the investment is held .
, 10. What is a "cash-on-cash" return in an LBO?
A. The total cash returned divided by the total cash invested
B. The IRR
C. The EBITDA multiple
D. The WACC
Answer: A
Rationale: Cash-on-cash return = Total Cash Returned / Total Cash Invested. It
measures the multiple of invested capital returned to investors .
11. Which metric is MOST commonly used to size debt in an LBO transaction?
A. Net Income
B. Free Cash Flow to Equity
C. EBITDA
D. Revenue
Answer: C
Rationale: Leverage is expressed as a multiple of EBITDA (e.g., 5.0x–6.0x Total
Debt / EBITDA). EBITDA approximates operating cash available to service debt .
12. What is the leverage ratio (Total Debt / EBITDA) in a typical middle-market
LBO?
A. 1x
B. 4x–6x
C. 10x
D. 12x
Answer: B
Rationale: Most lenders are comfortable with leverage in the 4x–6x range
depending on cash flow stability and industry dynamics .
**13. 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
