8/29/25, 5:28 AM LBO Modelling
LBO Modeling Study Guide Exam 2025-2026 \private
Equity & Investment Banking Interview Prep Exam
\complete questions and accurate detailed answers
\verified 100% \latest update
What is the biggest difference Unlike an M&A, we're not assuming the PE firm will
between an LBO and an M&A? keep the company long term
-opportunity to cut costs
-stable cash flows
What makes a good LBO
candidate? -good base of assets
-undervalued/low-risk
1. Make assumptions about the Purchase Price and how much
debt to use
2. Create a Financial Sources & Uses section
Walk me through a basic LBO 3. Adjust the company's Balance Sheet
model. 4. Project the company's statements and determine how
much debt you can pay off each year
5. Calculate the IRR and an EBITDA exit multiple
Why do you focus on Equity You need to acquire all the outstanding shares of a
value in an LBO? public company
Wait a minute - why do we First, note that Interest Expense NEVER shows up
show PIK under Cash Flow from Financing since it's tax
interest in the Cash Flow from
deductable. You show PIK on the CFO section because
Operations section? Isn't it a
it's a non-cash expense
Financing activity?
In an LBO model, is it Yes, and it happens more often than you'd think.
possible for debt investors Remember, High-Yield Debt investors often get interest
to earn a higher return than rates of 10-15% or more - which effectively guarantees
the PE firm? What does it an
tell us about the IRR in that range for them. The PE firm could also easily
company we're modeling? get a lower IRR if the EBITDA multiples contract, or the
company fails to grow
/ 1/1
2
, 8/29/25, 5:28 AM LBO Modelling
IRR will drop if:
-interest payments and principal repayments exceed
Most of the time, increased the company's cash flow, the IRR will drop.
leverage means an increased -there's declining growth or margins, you could also get
IRR. Explain how increasing a scenario where increasing debt past a certain point
the leverage could reduce results in a lower IRR.
the IRR.
***Increasing Debt will Increase IRR only up to a certain point
How do different types of It is almost always better to use Debt with lower
Debt and interest options interest rates and Debt that can be repaid early. So all
affect the IRR? For else being equal, having Term Loans rather than Senior
example, does it benefit the or
PE firm to use a higher Subordinated Notes or Mezzanine will boost IRR
percentage of Term Loans
or a
higher percentage of Senior
or
Subordinated Notes? What
about cash vs. PIK
interest?
/ 2/1
2
LBO Modeling Study Guide Exam 2025-2026 \private
Equity & Investment Banking Interview Prep Exam
\complete questions and accurate detailed answers
\verified 100% \latest update
What is the biggest difference Unlike an M&A, we're not assuming the PE firm will
between an LBO and an M&A? keep the company long term
-opportunity to cut costs
-stable cash flows
What makes a good LBO
candidate? -good base of assets
-undervalued/low-risk
1. Make assumptions about the Purchase Price and how much
debt to use
2. Create a Financial Sources & Uses section
Walk me through a basic LBO 3. Adjust the company's Balance Sheet
model. 4. Project the company's statements and determine how
much debt you can pay off each year
5. Calculate the IRR and an EBITDA exit multiple
Why do you focus on Equity You need to acquire all the outstanding shares of a
value in an LBO? public company
Wait a minute - why do we First, note that Interest Expense NEVER shows up
show PIK under Cash Flow from Financing since it's tax
interest in the Cash Flow from
deductable. You show PIK on the CFO section because
Operations section? Isn't it a
it's a non-cash expense
Financing activity?
In an LBO model, is it Yes, and it happens more often than you'd think.
possible for debt investors Remember, High-Yield Debt investors often get interest
to earn a higher return than rates of 10-15% or more - which effectively guarantees
the PE firm? What does it an
tell us about the IRR in that range for them. The PE firm could also easily
company we're modeling? get a lower IRR if the EBITDA multiples contract, or the
company fails to grow
/ 1/1
2
, 8/29/25, 5:28 AM LBO Modelling
IRR will drop if:
-interest payments and principal repayments exceed
Most of the time, increased the company's cash flow, the IRR will drop.
leverage means an increased -there's declining growth or margins, you could also get
IRR. Explain how increasing a scenario where increasing debt past a certain point
the leverage could reduce results in a lower IRR.
the IRR.
***Increasing Debt will Increase IRR only up to a certain point
How do different types of It is almost always better to use Debt with lower
Debt and interest options interest rates and Debt that can be repaid early. So all
affect the IRR? For else being equal, having Term Loans rather than Senior
example, does it benefit the or
PE firm to use a higher Subordinated Notes or Mezzanine will boost IRR
percentage of Term Loans
or a
higher percentage of Senior
or
Subordinated Notes? What
about cash vs. PIK
interest?
/ 2/1
2
