Lbo modelling exam from wall street prep 2024

LBO MODELLING EXAM FROM WALL STREET
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How do you use an LBO model to value a company, and why do we som
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etimes say that it sets the "floor valuation" for the company? - ANS-
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You use it to value a company by setting a targeted IRR (e.g., 25%) and t
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hen back- m



solving to determine what purchase price the PE firm could pay to achie
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ve that IRR.
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This is sometimes called a "floor valuation" because PE firms almost alwa
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ys pay less for a company than strategic acquirers would.
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Give an example of a "real-life" LBO. - ANS-
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The most common analogy is taking out a mortgage when you buy a hou
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se.


• Down Payment: Investor Equity m m m




• Mortgage: Debt m




• Mortgage Interest Payments: Debt Interest m m m m




• Mortgage Repayments: Debt Principal Repayments m m m m




• Selling the House: Selling the Company / Taking It Public
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Can you explain how the Balance Sheet is adjusted in an LBO model?
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- ANS-First, the Liabilities & Equities side is adjusted -
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mthe new debt is added on, and the Shareholders' Equity is "wiped out
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" and replaced byhowever much equity the private equity firm is cont
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ributing.

, What is an LBO? - ANS-
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A leveraged buyout is the acquisition of a company using debt instrume
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nts as the majority of the purchase price.
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