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Wall Street Prep Premium Exam with Answers 2024/2025
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Wall Street Prep Premium Exam with Answers 2024/2025
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Wall Street Julka X - (LBO Basic) ExamWith Answers 2024/2025
Walk me through a basic LBO Model.
"In an LBO Model, Step 1 is making assumptions about the Purchase Price, Debt/Equity ratio, Interest
Rate on Debt and other variables; you might also assume something about the company's operations,
such as Revenue Growth or Margins, depending on how much information you have.
Step 2 is to create a Sources & Uses section, which shows how you finance the transaction and what you
use the capital for; this also tells you how much Investor Equity is required.
Step 3 is to adjust the company's Balance Sheet for the new Debt and Equity figures, and also add in
Goodwill & Other Intangibles on the Assets side to make everything balance. In
Step 4, you project out the company's Income Statement, Balance Sheet and Cash Flow Statement, and
determine how much debt is paid off each year, based on the available Cash Flow and the required
Interest Payments.
Finally, in Step 5, you make assumptions about the exit after several years, usually assuming an EBITDA
Exit Multiple, and calculate the return based on how much equity is returned to the firm."
Why would you use leverage when buying a company?
To increase your returns.
Remember, any debt you use in an LBO is not "your money" - so if you're paying $5 billion for a
company, it's easier to earn a high return on $2 billion of your own money and $3 billion borrowed from
elsewhere vs. $3 billion of your own money and $2 billion of borrowed money.
A secondary benefit is that the firm also has more capital available to purchase other companies
because they've used leverage
What variables impact an LBO model the most?
Purchase and exit multiples have the biggest impact on the returns of a model. After that, the amount of
leverage (debt) used also has a significant impact, followed by operational characteristics such as
revenue growth and EBITDA margins.
How do you pick purchase multiples and exit multiples in an LBO model?
The same way you do it anywhere else: you look at what comparable companies are trading at, and
what multiples similar LBO transactions have had. As always, you also show a range of purchase and exit
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