LBO/Merger/Restructuring Test
Questions and 100% Correct Answers
What is a merger model used for? ✅A merger model is used to look at when one
company acquires another whether or not the proforma EPS is greater than the buyer's
standalone EPS
To do this you have to make assumptions about the purchase price / premium, the form
of consideration, the interest rate on new debt, and synergies you'd expect from the
transaction
1. Assumptions
2. Valuation
3. Pro forma shares
4. income statement projections
5. combine statements
6. divide by new share count
Calculating Offer value and then down to enterprise value ✅1. Share price x
(1+premium) = offer price
-not the sensitivity analyses on price and premiums
2. Calculate FD shares ouststanding (converts and stock options)
3. Offer price
4. Add non convertible debt
5. Add debt and preferred stock
6. Add non-controlling interest
Potential sources in M&A ✅-Third party debt (Senior secured, SLTL, Unsecured notes,
high yield bonds)
-stock
-excess cash on BS - minimum cash
What are the assumptions you need to make in accretion / dilution model ✅1. Offer
price (premium paid and premium paid to what price) 30 Day VWAP
2. Consideration: % stock vs % cash
3. How to fund cash portion (go up to a certain leverage and fund remaining with equity)
How would you estimate (roughly) how much debt capacity is available for a purchase?
✅Look at either
1. total leverage ratio / covenants of precedents in the
2. interest coverage ratio; and
3. minimum equity ratio
, 1. Total Leverage Ratio: 75% oare over 6x in this hot debt market and can fall to ~4.0x.
(cyclical business with few tangible asssets = lower of range; stable business with
tangible assets = higher end of range)
Interest Coverage Ratio: LTM EBIT/Annual Interest Expense floor is around 1.5x (this
means if the interest coverage is below 1.5x, then you have exceeded the capacity)
max debt = LTM EBIT/ 1.5 * Blended Interest Rate
• Minimum Equity Ratio: Lenders demand that about 20-30% of the total acquisition
price be equity, so you could estimate 75% of total acquisition price As such, you could
estimate:
Maximum Debt = 0.75 (Total Acquisition Price)
Methods for financing M&A ✅1. Exchanging stock
buyer exchanges shares in their own company for shares in the selling company
Safety; both parties share risks
Adv to Buyer: If stock is overvalued; cheaper than raising equity or more debt, does not
impact cash on BS
Adv to Seller: Potential in upside rather than just receiving money
Downside: stock volatility
2. Taking on debt
Many companies enter into M&A because of indebtedness (this can reduce sale value)
3. Paying with cash
mess-free
less-volatility
How to raise it:IPOs
What is a tender offer? ✅Basic Idea: An offer from an acquirer to all shareholders of a
publicly traded company to buy a larger number or all of shares at a PREMIUM PRICE
-from acquirer/investor
-to shareholders
-public company
-large are all shares
-at a prmeium
-caveat - must be able to buy a minimum number of shares
e.g.conditional on the investor being able to acquire more than 50% of total outstanding
shares
-can be hostile
Questions and 100% Correct Answers
What is a merger model used for? ✅A merger model is used to look at when one
company acquires another whether or not the proforma EPS is greater than the buyer's
standalone EPS
To do this you have to make assumptions about the purchase price / premium, the form
of consideration, the interest rate on new debt, and synergies you'd expect from the
transaction
1. Assumptions
2. Valuation
3. Pro forma shares
4. income statement projections
5. combine statements
6. divide by new share count
Calculating Offer value and then down to enterprise value ✅1. Share price x
(1+premium) = offer price
-not the sensitivity analyses on price and premiums
2. Calculate FD shares ouststanding (converts and stock options)
3. Offer price
4. Add non convertible debt
5. Add debt and preferred stock
6. Add non-controlling interest
Potential sources in M&A ✅-Third party debt (Senior secured, SLTL, Unsecured notes,
high yield bonds)
-stock
-excess cash on BS - minimum cash
What are the assumptions you need to make in accretion / dilution model ✅1. Offer
price (premium paid and premium paid to what price) 30 Day VWAP
2. Consideration: % stock vs % cash
3. How to fund cash portion (go up to a certain leverage and fund remaining with equity)
How would you estimate (roughly) how much debt capacity is available for a purchase?
✅Look at either
1. total leverage ratio / covenants of precedents in the
2. interest coverage ratio; and
3. minimum equity ratio
, 1. Total Leverage Ratio: 75% oare over 6x in this hot debt market and can fall to ~4.0x.
(cyclical business with few tangible asssets = lower of range; stable business with
tangible assets = higher end of range)
Interest Coverage Ratio: LTM EBIT/Annual Interest Expense floor is around 1.5x (this
means if the interest coverage is below 1.5x, then you have exceeded the capacity)
max debt = LTM EBIT/ 1.5 * Blended Interest Rate
• Minimum Equity Ratio: Lenders demand that about 20-30% of the total acquisition
price be equity, so you could estimate 75% of total acquisition price As such, you could
estimate:
Maximum Debt = 0.75 (Total Acquisition Price)
Methods for financing M&A ✅1. Exchanging stock
buyer exchanges shares in their own company for shares in the selling company
Safety; both parties share risks
Adv to Buyer: If stock is overvalued; cheaper than raising equity or more debt, does not
impact cash on BS
Adv to Seller: Potential in upside rather than just receiving money
Downside: stock volatility
2. Taking on debt
Many companies enter into M&A because of indebtedness (this can reduce sale value)
3. Paying with cash
mess-free
less-volatility
How to raise it:IPOs
What is a tender offer? ✅Basic Idea: An offer from an acquirer to all shareholders of a
publicly traded company to buy a larger number or all of shares at a PREMIUM PRICE
-from acquirer/investor
-to shareholders
-public company
-large are all shares
-at a prmeium
-caveat - must be able to buy a minimum number of shares
e.g.conditional on the investor being able to acquire more than 50% of total outstanding
shares
-can be hostile
