LBO EXAM QUESTIONS WITH 100%
CORRECT DETAILED ANSWERS
, LBO Characteristics - ANSWERPotential targets have predictable cash flows and
substantial assets.
60% to 70% debt vs. 30% to 40% from financial sponsors (equity contribution).
Sponsors have sought a 20% annual return and an "exit" within five years.
Growing in the past three decades due to the proliferation of junk bond market and the
private investment vehicles.
Key Participants - ANSWERFinancial Sponsors
Investment Banks
Capital Providers
Target MGMT
Financial Sponsors - ANSWERPrivate equity (PE) firms, investment banks (merchant
banking division), hedge funds, venture capital funds, SPACS, etc.
Due diligence: Learning as much as possible about the target to discover, confirm, or
discredit relevant information.
Investment Banks - ANSWERAdvisors (develop optimal financing structure)
Financing Commitments for debt
Capital Providers - ANSWERLoans: Banks and institutional lenders
Bond Investors: high yield bonds
Target Management - ANSWERFace of company
Holds considerable amount of equity of the post-LBO company.
Management buyout (MBO): An LBO originated by a target's existing management
team. run it better than current ownership
Characteristics of an LBO candidate - ANSWERStrong cash flow generation
Leading and defensible market positions
Growth opportunities
Efficiency enhancement opportunities (6 sigma)
Low capital expenditure requirements (+ cash flow)
Strong asset base (collateral)
Proven management team.
CORRECT DETAILED ANSWERS
, LBO Characteristics - ANSWERPotential targets have predictable cash flows and
substantial assets.
60% to 70% debt vs. 30% to 40% from financial sponsors (equity contribution).
Sponsors have sought a 20% annual return and an "exit" within five years.
Growing in the past three decades due to the proliferation of junk bond market and the
private investment vehicles.
Key Participants - ANSWERFinancial Sponsors
Investment Banks
Capital Providers
Target MGMT
Financial Sponsors - ANSWERPrivate equity (PE) firms, investment banks (merchant
banking division), hedge funds, venture capital funds, SPACS, etc.
Due diligence: Learning as much as possible about the target to discover, confirm, or
discredit relevant information.
Investment Banks - ANSWERAdvisors (develop optimal financing structure)
Financing Commitments for debt
Capital Providers - ANSWERLoans: Banks and institutional lenders
Bond Investors: high yield bonds
Target Management - ANSWERFace of company
Holds considerable amount of equity of the post-LBO company.
Management buyout (MBO): An LBO originated by a target's existing management
team. run it better than current ownership
Characteristics of an LBO candidate - ANSWERStrong cash flow generation
Leading and defensible market positions
Growth opportunities
Efficiency enhancement opportunities (6 sigma)
Low capital expenditure requirements (+ cash flow)
Strong asset base (collateral)
Proven management team.
