LBO Modeling / LBO Modelling
Exam from Wall Street Prep
2024 PASS A+
What do LBO FCF's tell us? - ✔✔✔ANSWER-Tells you how much
cash is available to repay *debt principal* each year after already
paying for normal expenses and debt interest
Can a PE firm earn a solid return if it buys a company for $1 billion
and sells it for $1 billion 5 years? - ✔✔✔ANSWER-Yes, if it uses a
certain amount of debt to purchase the company- if they raise
,$500m, and use $500 cash, the company's FCF's are able to pay
back the debt and the firm recieved $1 billion in cash at the end
(15% IRR)
Let's say that a PE firm borrows $10 million of debt to buy out a
company, and then sells the company in 5 years at the same EBITDA
multiple it purchased it for. If the PE firm does not pay off any debt
during those 5 years, what's the IRR? - ✔✔✔ANSWER-We need
*more information*: we only have the EV/EBITDA multiple, and don't
know how much EBITDA actually was to calculate an IRR
What is the biggest difference between an LBO and an M&A? -
✔✔✔ANSWER-Unlike an M&A, we're not assuming the PE firm will
keep the company long term
What makes a good LBO candidate? - ✔✔✔ANSWER--opportunity
to cut costs
-stable cash flows
-good base of assets
-undervalued/low-risk
Walk me through a basic LBO model. - ✔✔✔ANSWER-1. Make
assumptions about the Purchase Price and how much debt to use
2. Create a Financial Sources & Uses section
3. Adjust the company's Balance Sheet
, 4. Project the company's statements and determine how much debt
you can pay off each year
5. Calculate the IRR and an EBITDA exit multiple
Why do you focus on Equity value in an LBO? - ✔✔✔ANSWER-You
need to acquire all the outstanding shares of a public company
What is Bank Debt vs. High-Yield Debt? - ✔✔✔ANSWER--Bank debt
(Revolver, Term Loan A/B): Lower, floating interest rates, annual
principal repayments, *maintenance* covenants (i.e. Total
Debt/EBITDA must be below 4x), secured (collatoralized), allows
prepayment
High yield debt (Senior/Subordinate notes, Mezzanine): Higher, fixed
interest rates, no annual repayments, *incurrence* covenants (i.e.
the company can't acquire another and sell off assets), not secured,
doesn't allow prepayment
Why might a PE firm prefer High-Yield Debt? - ✔✔✔ANSWER--Don't
want the risk of *floating* rates
-Intend to *refinance* the debt
-Aren't planning big expansions
-Don't believe their returns are sensitive to interest payments
Exam from Wall Street Prep
2024 PASS A+
What do LBO FCF's tell us? - ✔✔✔ANSWER-Tells you how much
cash is available to repay *debt principal* each year after already
paying for normal expenses and debt interest
Can a PE firm earn a solid return if it buys a company for $1 billion
and sells it for $1 billion 5 years? - ✔✔✔ANSWER-Yes, if it uses a
certain amount of debt to purchase the company- if they raise
,$500m, and use $500 cash, the company's FCF's are able to pay
back the debt and the firm recieved $1 billion in cash at the end
(15% IRR)
Let's say that a PE firm borrows $10 million of debt to buy out a
company, and then sells the company in 5 years at the same EBITDA
multiple it purchased it for. If the PE firm does not pay off any debt
during those 5 years, what's the IRR? - ✔✔✔ANSWER-We need
*more information*: we only have the EV/EBITDA multiple, and don't
know how much EBITDA actually was to calculate an IRR
What is the biggest difference between an LBO and an M&A? -
✔✔✔ANSWER-Unlike an M&A, we're not assuming the PE firm will
keep the company long term
What makes a good LBO candidate? - ✔✔✔ANSWER--opportunity
to cut costs
-stable cash flows
-good base of assets
-undervalued/low-risk
Walk me through a basic LBO model. - ✔✔✔ANSWER-1. Make
assumptions about the Purchase Price and how much debt to use
2. Create a Financial Sources & Uses section
3. Adjust the company's Balance Sheet
, 4. Project the company's statements and determine how much debt
you can pay off each year
5. Calculate the IRR and an EBITDA exit multiple
Why do you focus on Equity value in an LBO? - ✔✔✔ANSWER-You
need to acquire all the outstanding shares of a public company
What is Bank Debt vs. High-Yield Debt? - ✔✔✔ANSWER--Bank debt
(Revolver, Term Loan A/B): Lower, floating interest rates, annual
principal repayments, *maintenance* covenants (i.e. Total
Debt/EBITDA must be below 4x), secured (collatoralized), allows
prepayment
High yield debt (Senior/Subordinate notes, Mezzanine): Higher, fixed
interest rates, no annual repayments, *incurrence* covenants (i.e.
the company can't acquire another and sell off assets), not secured,
doesn't allow prepayment
Why might a PE firm prefer High-Yield Debt? - ✔✔✔ANSWER--Don't
want the risk of *floating* rates
-Intend to *refinance* the debt
-Aren't planning big expansions
-Don't believe their returns are sensitive to interest payments
