M&A Final Exam Question and answers
verified to pass 2025
LBO participants - correct answer ✔financial sponsors, investment banks,
bank & institutional lenders, bond investor, target management
financial sponsors - correct answer ✔- private equity funds, hedge funds,
venture capital funds
- raise money from entities and wealthy individuals
- funds structured as limited partnerships
- vary in fund size, focus, investment strategy
- perform due diligence on target
investment banks - correct answer ✔- provide financing for deal or provide
advice and marketing on the deal
- perform credit analysis & due diligence of target
- advise sponsor on best financing structure
- provide financing commitment (underwriter)
- they do NOT plan to hold all of the debt
bank and institutional lenders - correct answer ✔- perform due diligence and
credit analysis of target OR rely on that done by lead arrangers
- want protective covenants and collateral
- attend "bank meeting"; get CIM
bond investors - correct answer ✔- buy high yield bonds
- attend roadshow presentation
,- receive offer memorandum
target management - correct answer ✔- perhaps the most important
marketers
- remain invested to align incentives
how LBO's generate returns - correct answer ✔they use debt instead of
equity and the equity that is used magnifies the return
pay down debt, debt, equity - correct answer ✔When I sell the company for
the same price I bought it, we're gonna use the money to __________. So,
when ____ goes down, the _______ goes up
IRR, cash return - correct answer ✔How we measure returns
primary exit/monetization strategies - correct answer ✔- sell it to strategic
buyer or another financial sponsor
- take it public, release IPO for portion of the shares
- recapitalize the firm (take on more debt)
- distressed debt repurchase
dollar amount of debt, proportion of debt, type of debt - correct answer ✔risk
is impacted by:
security - correct answer ✔collateral (lien)
seniority - correct answer ✔who gets paid first relative to other credit holders
, contractual seniority - correct answer ✔we're specifying in the bond contract
subordination provisions
structural seniority - correct answer ✔different legal entity, holding company
gets paid after operational company
maturity (tenor or term) - correct answer ✔how long until the bond is paid
back
coupon - correct answer ✔bank debt: quarterly and floating
bonds: semiannual and fixed
call protection - correct answer ✔there are normally _________ for half of
the tenor of the bond. First lien bank debt does NOT have this (ex: home
mortgage)
bank debt covenants - correct answer ✔restrictions part of bond contract
financial maintenance covenants - correct answer ✔require the borrower to
maintain their credit profile via quarterly financial ratios (ex: there might be a
maximum leverage ratio or minimum coverage ratio)
affirmative covenants - correct answer ✔require the borrower to take certain
actions (ex: pay taxes, maintaining insurance, complying with laws)
negative covenants - correct answer ✔you can't perform certain actions, limit
ability to take certain actions (ex: might limit the amount you can pay in
dividends, limit ability to dispose of certain assets or change the firm)
verified to pass 2025
LBO participants - correct answer ✔financial sponsors, investment banks,
bank & institutional lenders, bond investor, target management
financial sponsors - correct answer ✔- private equity funds, hedge funds,
venture capital funds
- raise money from entities and wealthy individuals
- funds structured as limited partnerships
- vary in fund size, focus, investment strategy
- perform due diligence on target
investment banks - correct answer ✔- provide financing for deal or provide
advice and marketing on the deal
- perform credit analysis & due diligence of target
- advise sponsor on best financing structure
- provide financing commitment (underwriter)
- they do NOT plan to hold all of the debt
bank and institutional lenders - correct answer ✔- perform due diligence and
credit analysis of target OR rely on that done by lead arrangers
- want protective covenants and collateral
- attend "bank meeting"; get CIM
bond investors - correct answer ✔- buy high yield bonds
- attend roadshow presentation
,- receive offer memorandum
target management - correct answer ✔- perhaps the most important
marketers
- remain invested to align incentives
how LBO's generate returns - correct answer ✔they use debt instead of
equity and the equity that is used magnifies the return
pay down debt, debt, equity - correct answer ✔When I sell the company for
the same price I bought it, we're gonna use the money to __________. So,
when ____ goes down, the _______ goes up
IRR, cash return - correct answer ✔How we measure returns
primary exit/monetization strategies - correct answer ✔- sell it to strategic
buyer or another financial sponsor
- take it public, release IPO for portion of the shares
- recapitalize the firm (take on more debt)
- distressed debt repurchase
dollar amount of debt, proportion of debt, type of debt - correct answer ✔risk
is impacted by:
security - correct answer ✔collateral (lien)
seniority - correct answer ✔who gets paid first relative to other credit holders
, contractual seniority - correct answer ✔we're specifying in the bond contract
subordination provisions
structural seniority - correct answer ✔different legal entity, holding company
gets paid after operational company
maturity (tenor or term) - correct answer ✔how long until the bond is paid
back
coupon - correct answer ✔bank debt: quarterly and floating
bonds: semiannual and fixed
call protection - correct answer ✔there are normally _________ for half of
the tenor of the bond. First lien bank debt does NOT have this (ex: home
mortgage)
bank debt covenants - correct answer ✔restrictions part of bond contract
financial maintenance covenants - correct answer ✔require the borrower to
maintain their credit profile via quarterly financial ratios (ex: there might be a
maximum leverage ratio or minimum coverage ratio)
affirmative covenants - correct answer ✔require the borrower to take certain
actions (ex: pay taxes, maintaining insurance, complying with laws)
negative covenants - correct answer ✔you can't perform certain actions, limit
ability to take certain actions (ex: might limit the amount you can pay in
dividends, limit ability to dispose of certain assets or change the firm)
