LBO Modelling Exam Questions With Complete Solutions
A strategic acquirer usually prefers to pay for another company
with 100% cash - if that's the case, why would a PE firm want to
use debt in an LBO? Correct Answers 1. The PE firm doesn't
hold the company for the long-term, more concerned about
returns than the expense of debt
2. The company is responsible for repaying the debt, so the
company assumes the risk, whereas in an M&A, the buyer
"owns" the debt
Call protection vs. prepayment (debt) Correct Answers Call
protection refers to paying down the entire amount of debt
outstanding, while prepayment refers to paying down the debt
partially before the maturity date
Can a PE firm earn a solid return if it buys a company for $1
billion and sells it for $1 billion 5 years? Correct Answers 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)
Can you explain how the Balance Sheet is adjusted in an LBO?
Correct Answers Liabilities and Equity: any new debt is added,
and the seller's Shareholder's Equity is wiped out and replaced
by how much the PE firm is contributing
Assets: Cash is adjusted for any used to finance the deal, as well
as for transaction fees. Goodwill & Other Intangibles are then
created and used as a "plug"
, ***There will also be usual transaction effects: Asset Write-
Ups/Downs, DTL's, DTA's, Capitalized Financing Fees, etc.
Common Sources of Funding Correct Answers -Excess cash
-Debt (term loans, notes, etc.)
-Preferred stock
-Management rollover
-Sponsor equity
Common Uses of Funding Correct Answers -Buyout of oldco's
equity
-Refinancing of oldco debt
-Transaction & Financing fees
Do you pay the Equity Value or Enterprise Value in an LBO?
Correct Answers -If you *refinance* existing debt, the price
will be closer to the Enterprise Value
-if you *assume* the debt, the purchase price will be closer to
the Equity value
Explain how a Revolver is used in an LBO model. Correct
Answers You use a Revolver when the cash required for
Mandatory Debt Repayments exceeds the cash flow you have
available to repay them (you don't borrow extra monet unless
you need it)
Revolver Borrowing = MAX(0, Total Mandatory Debt
Repayment - Cash Flow Available to Repay Debt)
A strategic acquirer usually prefers to pay for another company
with 100% cash - if that's the case, why would a PE firm want to
use debt in an LBO? Correct Answers 1. The PE firm doesn't
hold the company for the long-term, more concerned about
returns than the expense of debt
2. The company is responsible for repaying the debt, so the
company assumes the risk, whereas in an M&A, the buyer
"owns" the debt
Call protection vs. prepayment (debt) Correct Answers Call
protection refers to paying down the entire amount of debt
outstanding, while prepayment refers to paying down the debt
partially before the maturity date
Can a PE firm earn a solid return if it buys a company for $1
billion and sells it for $1 billion 5 years? Correct Answers 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)
Can you explain how the Balance Sheet is adjusted in an LBO?
Correct Answers Liabilities and Equity: any new debt is added,
and the seller's Shareholder's Equity is wiped out and replaced
by how much the PE firm is contributing
Assets: Cash is adjusted for any used to finance the deal, as well
as for transaction fees. Goodwill & Other Intangibles are then
created and used as a "plug"
, ***There will also be usual transaction effects: Asset Write-
Ups/Downs, DTL's, DTA's, Capitalized Financing Fees, etc.
Common Sources of Funding Correct Answers -Excess cash
-Debt (term loans, notes, etc.)
-Preferred stock
-Management rollover
-Sponsor equity
Common Uses of Funding Correct Answers -Buyout of oldco's
equity
-Refinancing of oldco debt
-Transaction & Financing fees
Do you pay the Equity Value or Enterprise Value in an LBO?
Correct Answers -If you *refinance* existing debt, the price
will be closer to the Enterprise Value
-if you *assume* the debt, the purchase price will be closer to
the Equity value
Explain how a Revolver is used in an LBO model. Correct
Answers You use a Revolver when the cash required for
Mandatory Debt Repayments exceeds the cash flow you have
available to repay them (you don't borrow extra monet unless
you need it)
Revolver Borrowing = MAX(0, Total Mandatory Debt
Repayment - Cash Flow Available to Repay Debt)
