LBO Modeling Q&A Bundle

What is a leveraged buyout, and why does it work? PE firm acquires a company using a combination of Debt and Equity, operates it for several years, and then sells the company at the end of the period to realize a return on its investment. During the period of ownership, the PE firm uses the company...

LBO Acquisition of a company by an investor group Purchase price financed by debt PE firm uses the company's cash flows to pay interest expense on the debt and to pay off the debt principal LBO valuation represents the maximum amount a sponsor can pay in order to achieve its required return object...

1. How do you calculate the internal rate of return (IRR) in an LBO model, and what does it mean? The IRR in an LBO is "the effective annual compounded interest rate": For example, if you invest $100 in the beginning and get back $200 after 5 years, what interest rate would turn that $100 into $20...

Unfunded Revolver Revolver still available (ie hasnt been taken out) OID Discount on debt so OID= (100-price)/100*FV it means that to buy $100 of Face Value of the Term Loan, lenders would only have to give us $99 in cash. This $1 difference is amortized over time or when the loan is repaid BOP B...

2. Wait a minute, how are Call Protection and "Prepayment" different? Don't they refer to the same concept? Call Protection refers to paying off the entire debt balance, whereas "Prepayment" refers to repaying part of the principal early, before the official maturity date. 3. What are some exa...

What is a leveraged buyout (LBO)? In a leveraged buyout, a private equity firm (often called the financial sponsor) acquires a company with most of the purchase price being funded through the use of various debt instruments such as loans, bonds. The financial sponsor will secure the financing packag...

Leveraged Buyout (LBO) an attempt by employees, management, or a group of investors to purchase an organization primarily through borrowing (debt) total debt capacity Debt capacity refers to the total amount of debt a business can incur and repay according to the terms of a debt agreement this is ...

What is private equity? Private equity is equity capital that is not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity Capital for priv...

Tell me about the different types of debt you could use in an LBO. Revolver TLA TLB Senior Notes Subordinated Notes Mezzanine Each type of debt is arranged in order of rising interest rates - so the Revolver has the lowest interest rates, Term Loan A is slightly higher, B is slightly higher, Senior...

What is multiple Expansion? Basically when a company valuation increase with the EBITDA not changing What is Internal Rate of Return? A time-weighted metric that tells you what your compounded rate of return would be if you invested your money today and it grew at that rate over your investment hor...

Leveraged Buyout - LBO • An LBO is an acquisition of a target using primarily debt to finance the purchase • You buy a company using leverage, pay down debt with FCF and then hope to sell it later at a higher EBITDA multiple • Debt can be 60-70% of purchase price • LBOs can generate inves...

What will you be given in a paper LBO? 1) Capital Structure (% debt vs. equity) for leverage 2) Duration of investment for IRR estimation 3) Projected EBITDA for FCF (may be given in the form of revenue, growth rate and margins) 4) Depreciation and amortization expense for tax calculation 5) Cost of...

What are the differences between DCF and LBO cash flows? LBO cash flows are levered. They have interest expense accounted for while DCF cash flows generally do not. LBO cash flows also generally have a scheduled amortization of debt taken out. How do you increase your return in an LBO? More debt, e...

Changes That Increase IRR Lower Purchase Price, Less Equity, Higher Revenue Growth, Higher EBITDA Margins, Lower Interest Rates, Lower CapEx Changes That Reduce IRR: Higher Purchase Price, More Equity, Lower Revenue Growth, Lower EBITDA Margins, Higher Interest Rates, Higher CapEx What is a levera...