LBO MODEL (BASIC) EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED RATED ++
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Course
LBO
Institution
LBO
LBO MODEL (BASIC) EXAM QUESTIONS AND ANSWERS WITH COMPLETE SOLUTIONS VERIFIED RATED ++
Walk Me Through a Basic LBO's Mechanics ~Conceptually
Flipping a Business:
Purchase: w a lot of Debt (Leverage), & Minimal Equity
Operate: Use CFs to Pay Interest, Grow & Optimize to Increase Value
Sell:...
*IRR = ( Years Held) = 24% etc. ~assuming doubled $.
"Lets See How Low We Can Buy This Target Co, Optimally Finance The Buyout, Adjust
& Project Target Co's Financial Statements, & Then How High of an EBITDA Multiple
can we get on Exit"
, “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.
Why would you use Leverage when Buying a Company?
Increase Your Returns
*create a return on $ that's not yours = higher ROI.
**additional capital available = more opportunity to make LBOs
"The More Leverage (Debt) You Use, The Higher Your IRR Potential" ~on same amount
of your own capital.
*$1M @10% is a lot more than $100k @10% ($100k vs $10k returns) ~10x difference.
**just gotta pay the interest expense on the debt
"If I borrow $1M at 5%, and create a 10% return, I just made $50k using someone else's
capital"
*the less of your own capital you put up, and the more investor capital you use = the
higher your IRR.
Example:
"If you put up $10 and borrowed $90 = $100, made a 5% return, you profited $5, which
is a 50% IRR" ~adjust for interest rate.
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