IB - BASIC IBO MODEL questions & answers with solutions 2025

Walk me through a basic LBO model. - ANSWER Step 1: Determine the purchase price by focusing on precedent transactions since you are buying the company and need to include the premium paid in other transactions. Step 2: How will the deal be financed. Source of funds includes the capital required to complete the transaction. Step 3: Create a pro forma balance sheet by adjusting the existing balance sheet of the company to reflect the LBO transaction, including the new capital structure. Step 4: Create an integrated cash flow model for the company. Project the company's income statement, balance sheet and cash flow statement for a period of time, which could be five or 10 years, to reflect the changes in the financial model due to the leveraged buyout. Step 5: Exit strategy for the PE firm. Acquired company will likely be sold or taken public through an IPO in three to five years Step 6: Calculate the IRRs for PE firms and other parties. The IRR is dependent on various assumptions such as sale multiple, length of time the investment is kept and the amount of equity put in by the PE firm Step 7: Evaluate credit ratios of the company. We look at the important credit ratios such as debt/EBITDA and EBITDA/interest expense Why would you use leverage when buying a company? - ANSWER To increase your returns. The firm also has more capital available to purchase other companies. What variables impact an LBO model the most? - ANSWER 1. Purchase and exit multiples 2. The amount of leverage used 3. Operational characteristics such as revenue growth and EBITDA margins