LBO Model (Breaking Into Wall
Street) EXAM 2024 UPDATE
"Real-Life" LBO - ✔✔✔ANSWER-Common example; mortgage on a house.
a)Down payment -- investor equity b)Mortgage -- debt c)Mortgage interest
payments -- Debt interest d) Mortgage repayments -- debt principal repayments e)
Selling the house -- selling the company/taking it public
What is an "ideal" candidate for an LBO? - ✔✔✔ANSWER-1) Stable and
predictable cash flows 2) low-risk businesses 3) low capex 4) opportunity for
expense reductions to boost margins 5)Strong management team 6) base of assets
to use as a collateral for debt
What is tenor? - ✔✔✔ANSWER-Years the loan is outstanding
, Amortization, types and what they are? - ✔✔✔ANSWER-Straight line: Pays off a
bit every year.
Bullet: Pays off the entire principal at the end
Analyzing how much debt a company a company can take on. and what the terms
of debt should be. What are reasonable leverage and coverage ratios? -
✔✔✔ANSWER-Dependent on comparable LBO transactions. Look at "debt
comps" showing the types, tranches, and terms of debt. Suggested to never lever a
company 50x EBITDA and leverage rarely exceeds 5-10x EBITDA.
Any shortcuts building an LBO model? - ✔✔✔ANSWER-Yes shortcuts. You can
make assumptions on the Net Change in Working Capital rather than look at each
individual item. Need some income statement to track debt balance and changes.
need some cash flow to show cash available to repay debt.
Can you explain how the Balance Sheet is adjusted in an LBO model? -
✔✔✔ANSWER-Liabilities & Equities: +new debt. Shareholder's equity is reset
based on how much equity the acquirer is contributing.
Assets: always cash is adjusted for expenditures used to finance it. Goodwill &
other intangibles are used as "plugs" to make it balance. Some transactions will
have capitalized financing fees and other effects on the asset side.
How could a private equity firm boost its return in an LBO? - ✔✔✔ANSWER-
Theoretically in the model 1) Lower purchase price 2)Raise the exit multiple or
exit price. 3) Increase leverage used. 4)Increase company's growth rate via
acquisitions 5) increase margins by reducing expenses
How do you determine how much debt can be raised in an LBO and how many
tranches there would be? - ✔✔✔ANSWER-Usually look at Comparable LBOs to
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