LBO Model Exam Questions & Answers

LBO Model Exam Questions & Answers What is an LBO? - ANSWER ️️ A leveraged buyout is the acquisition of a company using debt instruments as the majority of the purchase price. Pros: 1. Valuation is realistic as it does not require synergies to achieve. Cons: 1. Ignoring synergies could result in an underestimated valuation. 2. Very sensitive to operating (growth rate, margins, etc) and financial (multiples) assumptions. Why would you use leverage when buying a company? - ANSWER ️️ To boost the investor's return. The less of their own capital is invested, the easier it is to earn a higher return. Another benefit is that the investor also has more capital available to purchase other companies because they've used leverage. What variables impact an LBO model the most? - ANSWER ️️ 1. Purchase and exit multiples have the biggest impact on the returns of a model. 2. The amount of leverage (debt) used also has a significant impact. 3. Operational characteristics such as revenue growth and EBITDA margins. How do you pick purchase multiples and exit multiples in an LBO model? - ANSWER ️️ You look at the range of multiples for similar LBO transactions of comparable companies, and choose the multiples appropriate for your situation. Sometimes you set purchase and exit multiples based on a specific IRR target that you're trying to achieve - but this is just for valuation purposes if you're using an LBO model to value the company.