Wall Street Prep LBO Modeling Comprehensive
Exam Solutions
July 6, 2025
,Contents
1 Introduction to LBO Modeling 5
2 Core Components of an LBO Model 5
3 100 LBO Modeling Exam Questions and Solutions 5
3.1 Foundational Questions (130) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1.1 Question 1: What defines an LBO transaction? . . . . . . . . . . . . . . . . . 5
3.1.2 Question 2: Why is leverage critical in LBOs? . . . . . . . . . . . . . . . . . . 6
3.1.3 Question 3: How is the purchase price typically set? . . . . . . . . . . . . . . . 6
3.1.4 Question 4: How do you calculate Free Cash Flow (FCF) in an LBO? . . . . . . 6
3.1.5 Question 5: What is the Internal Rate of Return (IRR)? . . . . . . . . . . . . 6
3.1.6 Question 6: How is Multiple on Invested Capital (MOIC) computed? . . . . . . 6
3.1.7 Question 7: What comprises the sources and uses table? . . . . . . . . . . . . . 7
3.1.8 Question 8: What does a cash-free, debt-free (CFDF) transaction entail? . . . . . 7
3.1.9 Question 9: How is goodwill calculated in an LBO? . . . . . . . . . . . . . . . 7
3.1.10 Question 10: What creates a deferred tax liability (DTL)? . . . . . . . . . . . . 7
3.1.11 Question 11: What is the purpose of a debt schedule? . . . . . . . . . . . . . . 7
3.1.12 Question 12: What is a revolving credit facility? . . . . . . . . . . . . . . . . 7
3.1.13 Question 13: What characterizes a term loan? . . . . . . . . . . . . . . . . . 8
3.1.14 Question 14: What are subordinated notes? . . . . . . . . . . . . . . . . . . . 8
3.1.15 Question 15: How is exit enterprise value estimated? . . . . . . . . . . . . . . 8
3.1.16 Question 16: How do you calculate net debt? . . . . . . . . . . . . . . . . . . 8
3.1.17 Question 17: What are transaction fees in an LBO? . . . . . . . . . . . . . . . 8
3.1.18 Question 18: What are financing fees? . . . . . . . . . . . . . . . . . . . . . 8
3.1.19 Question 19: What is a paper LBO? . . . . . . . . . . . . . . . . . . . . . . 8
3.1.20 Question 20: Why conduct sensitivity analysis in LBOs? . . . . . . . . . . . . 8
3.1.21 Question 21: What is a dividend recapitalization? . . . . . . . . . . . . . . . 8
3.1.22 Question 22: What is purchase price allocation (PPA)? . . . . . . . . . . . . . 9
3.1.23 Question 23: What are the primary drivers of IRR? . . . . . . . . . . . . . . . 9
3.1.24 Question 24: What is a management rollover? . . . . . . . . . . . . . . . . . . 9
3.1.25 Question 25: Why assume an exit multiple? . . . . . . . . . . . . . . . . . . . 9
3.1.26 Question 26: How does leverage impact risk? . . . . . . . . . . . . . . . . . . 9
3.1.27 Question 27: What is a tax shields role? . . . . . . . . . . . . . . . . . . . . 9
3.1.28 Question 28: What is the Rule of 72 in LBOs? . . . . . . . . . . . . . . . . . 9
3.1.29 Question 29: How is EBITDA derived? . . . . . . . . . . . . . . . . . . . . 9
3.1.30 Question 30: What is a cash sweep? . . . . . . . . . . . . . . . . . . . . . . 9
3.2 Intermediate Questions (3160) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2.1 Question 31: How does working capital affect FCF? . . . . . . . . . . . . . . 10
1
, CONTENTS 2
3.2.2 Question 32: Why is CapEx critical in LBOs? . . . . . . . . . . . . . . . . . 10
3.2.3 Question 33: How is interest expense modeled? . . . . . . . . . . . . . . . . . 10
3.2.4 Question 34: What is a Payment-in-Kind (PIK) loan? . . . . . . . . . . . . . . 10
3.2.5 Question 35: How does PIK interest impact FCF? . . . . . . . . . . . . . . . 10
3.2.6 Question 36: What are debt covenants? . . . . . . . . . . . . . . . . . . . . . 10
3.2.7 Question 37: How do covenants affect LBO structuring? . . . . . . . . . . . . 10
3.2.8 Question 38: What is the sponsors role in an LBO? . . . . . . . . . . . . . . . 10
3.2.9 Question 39: How is equity value calculated? . . . . . . . . . . . . . . . . . . 11
3.2.10 Question 40: How does depreciation impact FCF? . . . . . . . . . . . . . . . 11
3.2.11 Question 41: How are Net Operating Losses (NOLs) modeled? . . . . . . . . . 11
3.2.12 Question 42: What is a stub period in projections? . . . . . . . . . . . . . . . 11
3.2.13 Question 43: How do you handle stub periods? . . . . . . . . . . . . . . . . . 11
3.2.14 Question 44: What is a bridge loan in LBOs? . . . . . . . . . . . . . . . . . . 11
3.2.15 Question 45: How does a bridge loan affect the model? . . . . . . . . . . . . . 11
3.2.16 Question 46: What is a roll-up strategy? . . . . . . . . . . . . . . . . . . . . 11
3.2.17 Question 47: How does a roll-up impact IRR? . . . . . . . . . . . . . . . . . 11
3.2.18 Question 48: What is a waterfall schedule? . . . . . . . . . . . . . . . . . . . 12
3.2.19 Question 49: How do you model a waterfall schedule? . . . . . . . . . . . . . . 12
3.2.20 Question 50: What is a PIK toggle? . . . . . . . . . . . . . . . . . . . . . . 12
3.2.21 Question 51: How do you model operational improvements? . . . . . . . . . . . 12
3.2.22 Question 52: What is the impact of a shorter holding period? . . . . . . . . . . 12
3.2.23 Question 53: How does revenue growth affect LBO outcomes? . . . . . . . . . . 12
3.2.24 Question 54: What is a pro forma income statement? . . . . . . . . . . . . . . 12
3.2.25 Question 55: How do you adjust a pro forma income statement? . . . . . . . . . 12
3.2.26 Question 56: What is a leverage ratio? . . . . . . . . . . . . . . . . . . . . . 12
3.2.27 Question 57: Why is the leverage ratio important? . . . . . . . . . . . . . . . 13
3.2.28 Question 58: What is an interest coverage ratio? . . . . . . . . . . . . . . . . 13
3.2.29 Question 59: How does a low coverage ratio affect an LBO? . . . . . . . . . . 13
3.2.30 Question 60: What is a pro forma balance sheet? . . . . . . . . . . . . . . . . 13
3.3 Advanced Questions (61100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.3.1 Question 61: How does an intangible asset write-up affect goodwill? . . . . . . 13
3.3.2 Question 62: How is DTL amortization calculated? . . . . . . . . . . . . . . . 13
3.3.3 Question 63: What is a cash flow bridge? . . . . . . . . . . . . . . . . . . . . 13
3.3.4 Question 64: How do you construct a cash flow bridge? . . . . . . . . . . . . . 13
3.3.5 Question 65: What is a synergy in LBOs? . . . . . . . . . . . . . . . . . . . . 14
3.3.6 Question 66: How do synergies impact IRR? . . . . . . . . . . . . . . . . . . 14
3.3.7 Question 67: What is a platform company? . . . . . . . . . . . . . . . . . . . 14
3.3.8 Question 68: How do you model add-on acquisitions? . . . . . . . . . . . . . . 14
3.3.9 Question 69: What is a debt covenant breach? . . . . . . . . . . . . . . . . . 14
Exam Solutions
July 6, 2025
,Contents
1 Introduction to LBO Modeling 5
2 Core Components of an LBO Model 5
3 100 LBO Modeling Exam Questions and Solutions 5
3.1 Foundational Questions (130) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1.1 Question 1: What defines an LBO transaction? . . . . . . . . . . . . . . . . . 5
3.1.2 Question 2: Why is leverage critical in LBOs? . . . . . . . . . . . . . . . . . . 6
3.1.3 Question 3: How is the purchase price typically set? . . . . . . . . . . . . . . . 6
3.1.4 Question 4: How do you calculate Free Cash Flow (FCF) in an LBO? . . . . . . 6
3.1.5 Question 5: What is the Internal Rate of Return (IRR)? . . . . . . . . . . . . 6
3.1.6 Question 6: How is Multiple on Invested Capital (MOIC) computed? . . . . . . 6
3.1.7 Question 7: What comprises the sources and uses table? . . . . . . . . . . . . . 7
3.1.8 Question 8: What does a cash-free, debt-free (CFDF) transaction entail? . . . . . 7
3.1.9 Question 9: How is goodwill calculated in an LBO? . . . . . . . . . . . . . . . 7
3.1.10 Question 10: What creates a deferred tax liability (DTL)? . . . . . . . . . . . . 7
3.1.11 Question 11: What is the purpose of a debt schedule? . . . . . . . . . . . . . . 7
3.1.12 Question 12: What is a revolving credit facility? . . . . . . . . . . . . . . . . 7
3.1.13 Question 13: What characterizes a term loan? . . . . . . . . . . . . . . . . . 8
3.1.14 Question 14: What are subordinated notes? . . . . . . . . . . . . . . . . . . . 8
3.1.15 Question 15: How is exit enterprise value estimated? . . . . . . . . . . . . . . 8
3.1.16 Question 16: How do you calculate net debt? . . . . . . . . . . . . . . . . . . 8
3.1.17 Question 17: What are transaction fees in an LBO? . . . . . . . . . . . . . . . 8
3.1.18 Question 18: What are financing fees? . . . . . . . . . . . . . . . . . . . . . 8
3.1.19 Question 19: What is a paper LBO? . . . . . . . . . . . . . . . . . . . . . . 8
3.1.20 Question 20: Why conduct sensitivity analysis in LBOs? . . . . . . . . . . . . 8
3.1.21 Question 21: What is a dividend recapitalization? . . . . . . . . . . . . . . . 8
3.1.22 Question 22: What is purchase price allocation (PPA)? . . . . . . . . . . . . . 9
3.1.23 Question 23: What are the primary drivers of IRR? . . . . . . . . . . . . . . . 9
3.1.24 Question 24: What is a management rollover? . . . . . . . . . . . . . . . . . . 9
3.1.25 Question 25: Why assume an exit multiple? . . . . . . . . . . . . . . . . . . . 9
3.1.26 Question 26: How does leverage impact risk? . . . . . . . . . . . . . . . . . . 9
3.1.27 Question 27: What is a tax shields role? . . . . . . . . . . . . . . . . . . . . 9
3.1.28 Question 28: What is the Rule of 72 in LBOs? . . . . . . . . . . . . . . . . . 9
3.1.29 Question 29: How is EBITDA derived? . . . . . . . . . . . . . . . . . . . . 9
3.1.30 Question 30: What is a cash sweep? . . . . . . . . . . . . . . . . . . . . . . 9
3.2 Intermediate Questions (3160) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.2.1 Question 31: How does working capital affect FCF? . . . . . . . . . . . . . . 10
1
, CONTENTS 2
3.2.2 Question 32: Why is CapEx critical in LBOs? . . . . . . . . . . . . . . . . . 10
3.2.3 Question 33: How is interest expense modeled? . . . . . . . . . . . . . . . . . 10
3.2.4 Question 34: What is a Payment-in-Kind (PIK) loan? . . . . . . . . . . . . . . 10
3.2.5 Question 35: How does PIK interest impact FCF? . . . . . . . . . . . . . . . 10
3.2.6 Question 36: What are debt covenants? . . . . . . . . . . . . . . . . . . . . . 10
3.2.7 Question 37: How do covenants affect LBO structuring? . . . . . . . . . . . . 10
3.2.8 Question 38: What is the sponsors role in an LBO? . . . . . . . . . . . . . . . 10
3.2.9 Question 39: How is equity value calculated? . . . . . . . . . . . . . . . . . . 11
3.2.10 Question 40: How does depreciation impact FCF? . . . . . . . . . . . . . . . 11
3.2.11 Question 41: How are Net Operating Losses (NOLs) modeled? . . . . . . . . . 11
3.2.12 Question 42: What is a stub period in projections? . . . . . . . . . . . . . . . 11
3.2.13 Question 43: How do you handle stub periods? . . . . . . . . . . . . . . . . . 11
3.2.14 Question 44: What is a bridge loan in LBOs? . . . . . . . . . . . . . . . . . . 11
3.2.15 Question 45: How does a bridge loan affect the model? . . . . . . . . . . . . . 11
3.2.16 Question 46: What is a roll-up strategy? . . . . . . . . . . . . . . . . . . . . 11
3.2.17 Question 47: How does a roll-up impact IRR? . . . . . . . . . . . . . . . . . 11
3.2.18 Question 48: What is a waterfall schedule? . . . . . . . . . . . . . . . . . . . 12
3.2.19 Question 49: How do you model a waterfall schedule? . . . . . . . . . . . . . . 12
3.2.20 Question 50: What is a PIK toggle? . . . . . . . . . . . . . . . . . . . . . . 12
3.2.21 Question 51: How do you model operational improvements? . . . . . . . . . . . 12
3.2.22 Question 52: What is the impact of a shorter holding period? . . . . . . . . . . 12
3.2.23 Question 53: How does revenue growth affect LBO outcomes? . . . . . . . . . . 12
3.2.24 Question 54: What is a pro forma income statement? . . . . . . . . . . . . . . 12
3.2.25 Question 55: How do you adjust a pro forma income statement? . . . . . . . . . 12
3.2.26 Question 56: What is a leverage ratio? . . . . . . . . . . . . . . . . . . . . . 12
3.2.27 Question 57: Why is the leverage ratio important? . . . . . . . . . . . . . . . 13
3.2.28 Question 58: What is an interest coverage ratio? . . . . . . . . . . . . . . . . 13
3.2.29 Question 59: How does a low coverage ratio affect an LBO? . . . . . . . . . . 13
3.2.30 Question 60: What is a pro forma balance sheet? . . . . . . . . . . . . . . . . 13
3.3 Advanced Questions (61100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.3.1 Question 61: How does an intangible asset write-up affect goodwill? . . . . . . 13
3.3.2 Question 62: How is DTL amortization calculated? . . . . . . . . . . . . . . . 13
3.3.3 Question 63: What is a cash flow bridge? . . . . . . . . . . . . . . . . . . . . 13
3.3.4 Question 64: How do you construct a cash flow bridge? . . . . . . . . . . . . . 13
3.3.5 Question 65: What is a synergy in LBOs? . . . . . . . . . . . . . . . . . . . . 14
3.3.6 Question 66: How do synergies impact IRR? . . . . . . . . . . . . . . . . . . 14
3.3.7 Question 67: What is a platform company? . . . . . . . . . . . . . . . . . . . 14
3.3.8 Question 68: How do you model add-on acquisitions? . . . . . . . . . . . . . . 14
3.3.9 Question 69: What is a debt covenant breach? . . . . . . . . . . . . . . . . . 14
