12_LEVERAGED BUYOUT (LBO)
MODELS EXAM WITH COMPLETE
DETAILED QUESTIONS AND CORRECT
ANSWERS
, 12.1 Why would you want to use leverage when you buy a company, or when you buy a
house - ANSWERIt reduces how much you have to pay in cash upfront.
It makes it easier to earn a higher return on your investment... if it performs well.
Because money today is worth more than money tomorrow.
12.2 Who is the "buyer" in a leveraged buyout - ANSWERA shell holding corporation
created by the private equity firm.
12.3 What is the MAIN difference between a normal M&A deal and an LBO that
explains most of the other differences - ANSWERIn an LBO, the private equity firm
always plans to sell the company after a few years.
12.4 What is the LEAST credible sources of returns in a leveraged buyout -
ANSWERMultiple expansion.
12.5 Is it possible to achieve a positive IRR in an LBO if there's no multiple expansion
and no EBITDA growth - ANSWEROnly if a significant amount of debt is used and then
paid off.
12.6 What is the BEST exit strategy for selling a company after a leveraged buyout has
taken place - ANSWERA sale to a "strategic" (a normal company).
12.7 What is the fundamental question in this 7 Days Inn leveraged buyout case study -
ANSWERCan the shift to Managed Hotels offset the decline in occupancy rates across
all hotel segments
12.8 Why do you use options outstanding rather than options exercisable when
calculating the purchase equity value in a deal - ANSWERBecause all options typically
vest upon change of control.
12.9 Why might the "Funds Required" in an LBO be different from the purchase Equity
Value or Enterprise Value - ANSWERBecause of excess cash used by the target to
fund the deal.
Because of rollover equity.
Because of the debt assumed vs. refinanced options.
12.10 How is "Unsecured Debt" different from "Secured Debt" - ANSWERUnsecured
Debt has incurrence covenants, whereas Secured Debt has maintenance covenants.
MODELS EXAM WITH COMPLETE
DETAILED QUESTIONS AND CORRECT
ANSWERS
, 12.1 Why would you want to use leverage when you buy a company, or when you buy a
house - ANSWERIt reduces how much you have to pay in cash upfront.
It makes it easier to earn a higher return on your investment... if it performs well.
Because money today is worth more than money tomorrow.
12.2 Who is the "buyer" in a leveraged buyout - ANSWERA shell holding corporation
created by the private equity firm.
12.3 What is the MAIN difference between a normal M&A deal and an LBO that
explains most of the other differences - ANSWERIn an LBO, the private equity firm
always plans to sell the company after a few years.
12.4 What is the LEAST credible sources of returns in a leveraged buyout -
ANSWERMultiple expansion.
12.5 Is it possible to achieve a positive IRR in an LBO if there's no multiple expansion
and no EBITDA growth - ANSWEROnly if a significant amount of debt is used and then
paid off.
12.6 What is the BEST exit strategy for selling a company after a leveraged buyout has
taken place - ANSWERA sale to a "strategic" (a normal company).
12.7 What is the fundamental question in this 7 Days Inn leveraged buyout case study -
ANSWERCan the shift to Managed Hotels offset the decline in occupancy rates across
all hotel segments
12.8 Why do you use options outstanding rather than options exercisable when
calculating the purchase equity value in a deal - ANSWERBecause all options typically
vest upon change of control.
12.9 Why might the "Funds Required" in an LBO be different from the purchase Equity
Value or Enterprise Value - ANSWERBecause of excess cash used by the target to
fund the deal.
Because of rollover equity.
Because of the debt assumed vs. refinanced options.
12.10 How is "Unsecured Debt" different from "Secured Debt" - ANSWERUnsecured
Debt has incurrence covenants, whereas Secured Debt has maintenance covenants.
