Practice

A company has 60 million shares outstanding at a $12.00 per-share purchase price. Existing management rolls over 9 million of those shares instead of cashing out. How much does the Rollover reduce the PE firm's required funding by?

How does a Management Rollover affect the Sources & Uses schedule in an LBO?

A company has $200M of accumulated Net Operating Losses (NOLs) it can use to shelter future taxable income, but tax rules cap usage at $40M per year. In Year 1 post-deal, the company's Pre-Tax Income is $70M, and the tax rate is 25%. Calculate the company's cash taxes paid in Year 1, with and without the NOL shield, and the resulting cash tax savings.

A company has two Debt tranches: a Term Loan with a $300M current balance amortizing 8% of its original $400M principal annually, and Subordinated Notes with a $200M balance and no amortization or early repayment allowed. After mandatory repayments, the company has $60M of Cash Flow Available for Debt Repayment, with a 100% cash flow sweep applied entirely to the Term Loan. Calculate the Term Loan's mandatory repayment, its optional repayment, and its ending balance.

In a sources & uses table, what typically goes on each side?

Why might a PE firm recommend a deal even when the numbers look underwhelming across the board?

A company's agreed Purchase Enterprise Value is $1,000M, with a Working Capital target of $80M at deal close. At close, the company's actual Working Capital is only $55M. Calculate (a) the adjusted Purchase Enterprise Value line on the Uses side, (b) the separate Working Capital funding entry, and (c) confirm the PE firm's total payment is unchanged.

Using the approximation IRR ≈ (200% / Years) × 65% for a 3x multiple, estimate the IRR for a 3x multiple achieved over 4 years.

A company's post-deal leverage implies a BB credit rating, corresponding to a 4.5% default spread. The 10-year government bond yield is 3.5%. What interest rate should you assume on this company's Debt?

If a PE firm splits its investment 1/3 Preferred Stock (with a 12% coupon) and 2/3 Common Equity, and the Common Equity achieves a 25% IRR, does the blended return end up above or below 25%? Why?

How does a Working Capital target at deal close affect what the PE firm pays versus what selling shareholders receive?

A PE firm is buying a $180M EBITDA company and plans to use 5.0x Debt/EBITDA split evenly between a Term Loan at 7% interest and Subordinated Notes at 10% interest. Assuming EBITDA stays flat in Year 1, calculate the company's EBITDA/Interest coverage ratio.

How do you determine how much Debt a PE firm might use in an LBO, and how many tranches to include?

After Mandatory Repayments, a company has $140M of Cash Flow Available for Debt Repayment. With a 40% cash flow sweep, how much of the remaining Debt is optionally repaid?

Why is a floating interest rate more common on Secured Debt than on Unsecured Debt in an LBO?

How does an LBO valuation differ from a DCF valuation, even though both are based on projected cash flows?

Why does every LBO model need a Minimum Cash assumption?

What's the difference between IRR and MOIC?

How can you estimate the interest rate on a company's Debt in an LBO if there's no comparable Debt data available?

Walk me through the 5 basic steps of building an LBO model.

How can a PE firm reduce its downside risk in an LBO, beyond simply using less Debt?

A sponsor buys a company for $500M (10x EBITDA of $50M), funded with 60% debt / 40% equity. In year 5, EBITDA has grown to $65M, debt has been paid down to $150M, and the exit multiple is still 10x. What's the IRR and MOIC?

A company executes a $120M Dividend Recap with $3M in financing fees. By how much does the Debt's book value on the Balance Sheet increase?

An LBO's initial Investor Equity is $600M, and the Exit Equity Value is $1,100M, before accounting for a 10% options pool. Using the quick-and-dirty method, what are the PE firm's exit proceeds after the options pool?

How does an Earn-Out affect a PE firm's IRR in an LBO?

A company's EBITDA has grown to $250M by Year 5 and it's sold at a 9.0x exit multiple. What's the Exit Enterprise Value?

A PE firm acquires a $150M EBITDA company using 50% Debt at an 8.0x purchase multiple. By Year 3, EBITDA has grown to $225M and the exit multiple stays the same. Assuming the company generates no extra Cash and repays no Debt beyond what's already required, what's the minimum MoM multiple the PE firm could realize?

A private company has $220M of EBITDA and is acquired at a 9.5x multiple in a cash-free, debt-free deal. New Debt is $950M at face value, with $15M in financing fees. Minimum Cash required is $40M, and legal and advisory fees total $20M. Calculate the required Investor Equity and the Debt's initial book value on the Balance Sheet.

A company's Accounts Receivable balance is $80M at the start of an interpolation window and grows to $104M by the end of it. Using a stub-period fraction of 0.60, what's the interpolated balance at the stub close date?

Why do call premiums on Subordinated Notes push a PE firm toward a longer holding period?

A waterfall structure allocates 10% of proceeds to management up to a $400M threshold (90% to the PE firm), and the deal generates exactly $400M in total Exit Equity Proceeds. How much does management receive?

Why does a Management Rollover effectively reduce the amount the PE firm has to fund, even though the headline Purchase Enterprise Value doesn't change?

In a cash-free, debt-free LBO of a private company, what happens to the target's existing Cash and Debt?

A company generates $120M of Free Cash Flow in a year. Beginning Cash is $60M and Minimum Cash required is $90M. How much can go toward repaying Debt?

What do the Debt/EBITDA, EBITDA/Interest, and FCF Conversion ratios tell you about how an LBO is performing?

A company has EBITDA of $40M and Debt/EBITDA of 3.0x. What's total debt?

A Term Loan starts Year 1 with a $500M balance and a 6% interest rate. In Year 1, the company repays $80M of principal (interest is calculated on the beginning-of-period balance). In Year 2, strong cash flow lets the company repay another $100M of principal, still at 6% on the Year 2 beginning balance. Calculate the Interest Expense in both Year 1 and Year 2, and the ending Term Loan balance after Year 2.

A PE firm acquires a company for a $1,500M Purchase Enterprise Value. The company's identifiable net tangible and intangible assets, after write-ups, are valued at $900M. How much Goodwill is created?

A PE firm buys a $100M EBITDA company at a 10.0x multiple, using 5.0x Debt/EBITDA. It plans to exit in 5 years at the same 10.0x multiple, with no Debt repaid and no extra Cash generated. What EBITDA is needed to achieve a 25% IRR (~3.0x multiple)?

How do you attribute EBITDA growth between Volume and Pricing effects in an LBO model, and why does the distinction matter?

How do Legal/Advisory Fees and Financing Fees get treated differently on an LBO's Balance Sheet?

A PE firm wants a 25% IRR (~3.0x multiple) over 5 years. It plans to sell the company for an Exit Enterprise Value of $1,800M, using a 50/50 Debt/Equity split with no Debt repaid and no extra Cash generated during the hold. What's the maximum Purchase Enterprise Value it could pay?

How is Free Cash Flow in an LBO model different from Free Cash Flow in a DCF?

A PE firm wants to use 4.5x Debt/EBITDA to fund the acquisition of a $90M EBITDA company. How much Debt will it use?

Why doesn't using leverage in an LBO actually 'increase' returns?

Why is stable, predictable cash flow more important than growth potential for a typical LBO candidate?

When reviewing a CIM on a potential LBO candidate, what's the efficient order to work through it, and why?

What does the 'tax shield' from Debt mean in an LBO, and how big of an impact does it actually make?

A Term Loan's rate is set at MAX(2.0% floor, benchmark rate) + 4.0% spread. If the benchmark rate is currently 1.2%, what interest rate does the company pay?

Using the same structure (MAX(2.0% floor, benchmark) + 4.0% spread), if the benchmark rate rises to 5.5%, what interest rate does the company pay?

A PE firm buys a $150M EBITDA company for an 8.0x multiple, funded with 55% Debt. What's the Investor Equity?

What's the one place Purchase Price Allocation still matters in an LBO, despite generally mattering less than in an M&A deal?

Beginning Cash is $30M, Free Cash Flow is $50M, Mandatory Debt Repayments are $70M, and Minimum Cash required is $40M. How much must the company draw on its Revolver?

A company executes a $150M Dividend Recap with $4M in financing fees. By how much does its Cash balance decrease?

A PE firm acquires a $100M EBITDA company at a 10.0x purchase multiple, using 50% Debt. In Year 5, EBITDA has grown to $160M and the company is sold at a 9.0x exit multiple. The company repaid $300M of the initial Debt over the holding period and generated no additional Cash. Estimate the approximate IRR.

A company can grow by selling more units, raising prices, or cutting costs, all by the same percentage. Which improves EBITDA the most, and why?

A PE firm buys a company for $200M EBITDA at an 8.0x purchase multiple, using $800M of Debt and $800M of Investor Equity. By Year 5, EBITDA has grown to $280M and the exit multiple is 9.0x. The company has repaid $300M of Debt and generated no extra Cash. Calculate the Returns Attribution: how much of the total return comes from EBITDA Growth, Multiple Expansion, and Debt Paydown.

What's the single most important factor in determining whether a company is a good LBO candidate?

Why might a PE firm choose more expensive Subordinated Notes over cheaper Term Loans?

What are the three main exit strategies in an LBO, and why do PE firms overwhelmingly prefer M&A exits?

What's the practical difference between a Revolver draw and issuing new Term Loan Debt when a company needs extra financing mid-year?

An LBO's initial Investor Equity is $700M, and the Exit Equity Value before options is $1,400M, with a 5% options pool. Using the quick-and-dirty method, what's the PE firm's exit proceeds after the options pool?

Why might a PE firm reject a deal even when the IRR and MoM multiples look favorable in every case?

Between an extra dollar of EBITDA and an extra dollar of Debt paydown, which is more valuable to a PE firm's returns, and why?

A PE firm invests $400M and exits after 5 years with $1,000M in proceeds. What's the approximate IRR?

Why does a Stub Period require using XIRR instead of the standard IRR function?

Why does an interest rate floor matter for a floating-rate Term Loan, and how is it typically structured?

A company has $300M of Subordinated Notes with a declining call premium schedule: 105% of principal in Year 3, and 100% (no premium) from Year 8 onward. If a PE firm exits in Year 3 with an Exit Enterprise Value of $1,000M, versus waiting until Year 8 when the Exit Enterprise Value has grown to $1,150M, calculate the Exit Equity Proceeds in each scenario. Assume no other Debt besides the $300M Notes and no Cash generated in either case.

A company has $200M of Subordinated Notes outstanding at exit, and the applicable call premium at this point in the schedule is 103% of principal. How much cash does the company need to fully retire this Debt?

A PE firm uses an $800M Shareholder Loan with 8% PIK interest. How much PIK Interest accrues to the loan's principal in Year 1?

A company's Term Loan has a $500M starting balance and amortizes 10% of its original principal annually. Beginning Cash is $40M, Free Cash Flow for the year is $150M, Minimum Cash required is $50M, and the cash flow sweep is 50%. Calculate the mandatory repayment, the optional (swept) repayment, and the Term Loan's ending balance.

Beginning Cash is $40M, Free Cash Flow for the year is $90M, Minimum Cash required is $60M, and there are no mandatory repayments this year. How much is available to repay Debt?

How does an increase in purchase price multiple affect LBO returns, all else equal?

A PE firm invests $900M total in a deal: $300M in Preferred Stock with a fixed 12% coupon (accrued as PIK, paid at exit) and $600M in Common Equity. At exit in Year 5, the Common Equity portion is worth $2,100M (a 3.5x multiple on the Common investment). Calculate the Preferred Stock's exit value using simple, non-compounded accrual, and the total blended MoM multiple on the full $900M investment.

What's the "true price" of a public company LBO, and why bother building a Sources & Uses schedule at all?

A private company has $180M of EBITDA and is being acquired at a 9.0x EBITDA multiple in a cash-free, debt-free deal. New Debt will be $700M. Minimum Cash required is $30M. Transaction and financing fees total $25M. Calculate the required Investor Equity.

A PE firm agrees to a $50M Earn-out payment to the original selling shareholders, payable in Year 2 if the company hits its EBITDA target (which it does). Its Investor Equity was $500M, and its Exit Equity Proceeds in Year 5, before considering the Earn-out, are $1,300M. What MoM multiple does the PE firm actually realize after the Earn-out payment?

A company has $80M of EBITDA and is acquired at a 9.5x EBITDA multiple. What's the Purchase Enterprise Value?

The Investor Equity in an LBO is $450M, and the Exit Equity Proceeds in Year 5 would normally be $1,080M. Instead, the PE firm executes a $360M Dividend Recap in Year 3, so the remaining Year 5 proceeds fall to $720M. Estimate the new IRR using the average exit year method, and compare it to the no-recap baseline.

What is a dividend recapitalization (dividend recap)?

What could trigger Multiple Expansion in an LBO, and is it a defensible assumption to underwrite a deal to?

Why would a PE firm use a Shareholder Loan instead of straightforward Common Equity?

How does a Net Operating Loss (NOL) affect an LBO's cash flow?

A PE firm wants a 15% IRR over 5 years (~2.0x multiple) and expects Exit Equity Proceeds of $900M. What's the most Investor Equity it can contribute?

Why might a sponsor prefer more debt tranches (e.g., a term loan plus high-yield bonds) instead of a single loan?

A PE firm invests $900M total: 1/3 in Preferred Stock earning a fixed 12% return, and 2/3 in Common Equity earning a 28% IRR. Approximately what's the blended IRR on the total investment?

Why might a company's Free Cash Flow in a given year differ from its Cash Flow Available for Debt Repayment in that same year?

After mandatory repayments, a company has $120M of Cash Flow Available for Debt Repayment, and its cash flow sweep is 60%. How much optional Debt repayment is made (assuming enough Debt remains)?

Initial Debt used in an LBO is $600M. Over the holding period, the company repays $200M of principal and generates no extra Cash. What's the Net Debt at exit?

A PE firm invests $500M and receives $1,250M in Exit Equity Proceeds after 5 years, with no interim Dividends. Using the quick rules of thumb, what's the approximate IRR?

Walk me through a basic LBO model.

Would a PE firm rather achieve a high IRR or a high MoM multiple in a leveraged buyout?

What IRR and MoM multiple do PE firms typically target, and how does a longer average holding period change the targeted multiple?

Using the same deal as above ($150M EBITDA, 8.0x purchase multiple, 50% Debt, $600M Investor Equity, $1,800M Exit Enterprise Value), if the company instead repays its entire $600M of Debt by Year 3 and nothing else changes, what MoM multiple does the PE firm realize?

A Term Loan tranche amortizes at 15% of its original $400M principal each year, but only $45M of the loan remains outstanding. How much is repaid this year?

Why isn't the private equity firm itself on the hook for the Debt used to fund an LBO?

Why is Stock never available as a Source of Funds in a leveraged buyout, unlike in a normal M&A deal?

A company's Year 0 Revenue is $500M, from 10 million units sold at a $50 average price. In Year 1, it sells 11 million units at an average price of $53. Attribute the total Revenue growth between the Volume effect and the Pricing effect.

Why do LBO models focus on EBITDA and TEV/EBITDA rather than Free Cash Flow-based or Equity Value-based multiples for the purchase and exit assumptions?

Using the approximation IRR ≈ (100% / Years) × 75% for a 2x multiple, estimate the IRR for a 2x multiple achieved over 4 years.

Rank the assumptions that impact an LBO's returns the most, and explain why.

A tranche of Debt amortizes at 20% of its original $150M principal each year, but only $18M remains outstanding. How much is repaid this year?

A waterfall structure gives management (Investor Group A) 10% of proceeds up to a 15% IRR, then 20% of proceeds above a 15% IRR (with the PE firm, Investor Group B, receiving the rest each tier). The deal generates $600M in Exit Equity Proceeds, corresponding to an 18% IRR. The proceeds level corresponding to exactly a 15% IRR is $500M. How much does each investor group receive?

What makes an industry more or less appealing as an LBO target, beyond the target company itself?

A PE firm invests $300M and exits after 3 years with $900M in proceeds, with no interim cash flows. What's the approximate IRR?

A deal's stub period requires estimating December 31 Balance Sheet values by interpolating between the prior and next annual data points, using a stub fraction of 0.753. Inventory is $180M at the start of the window and $210M at the end; Accounts Payable is $90M at the start and $99M at the end. Calculate the interpolated December 31 balance for both line items, and the resulting net Working Capital impact versus using the start-of-window figures.

Why do the less risky, lower-yielding tranches of Debt, like Term Loans, tend to have amortization, while riskier tranches like Subordinated Notes don't?

A bond with a $1,000 Face Value is issued at 94% of face to boost its yield to investors. What's the Original Issue Discount (OID) in dollars?

An LBO's Investor Equity is $600M, and without any Dividend Recap, the Exit Equity Proceeds in Year 5 would be $1,500M. Instead, the PE firm executes a $500M Dividend Recap in Year 3, reducing the Year 5 Exit Equity Proceeds to $1,000M. Estimate the approximate IRR using the average exit year method, and compare it to the no-recap baseline.

A company issues $150M of Debt with $6M in financing fees. What's the initial book value of the Debt recorded on the Balance Sheet?

An LBO has $500M of Investor Equity and a 10% options pool. At exit, the Exit Equity Value (before accounting for the options) is $1,000M. Using the precise method that grosses up the share count, calculate the Cash from Management Options, the Equity to Management Options, and the PE firm's final Exit Equity Proceeds.

Why do you use the company's beginning-of-period Debt balance, not the average balance, to calculate Interest Expense in an LBO model?

Continuing the same deal: instead of holding steady at 9.0x, the company's EBITDA multiple declines by roughly 10% per year in Years 4 and 5 (from 9.0x to about 8.0x to about 7.0x). Estimate the new average exit multiple and the resulting IRR.

Why does Purchase Price Allocation matter less in an LBO model than it does in a normal M&A deal?

How do you select the Purchase Multiple and Exit Multiple differently for a public LBO target versus a private one?

Exit Enterprise Value is $2,000M and Net Debt at exit is $350M. What are the Exit Equity Proceeds?

Why do cash flow sweeps typically apply only to certain Debt tranches, like Term Loans, and not others, like Subordinated Notes?

How does increasing leverage (debt) in an LBO affect equity returns?

Beginning Cash is $40M, Mandatory Debt Repayments are $90M, Free Cash Flow is $60M, and Minimum Cash required is $80M. How much must the company draw on its Revolver?

A PE firm acquires a $150M EBITDA company at a 7.0x purchase multiple, using 50% Debt. It can't find a buyer after 3 years, so it takes the company public instead and sells off its stake evenly across Years 3, 4, and 5. By the end, EBITDA has grown to $175M, all the initial Debt has been repaid, and the average sale multiple across those years is 9.0x. Estimate the approximate IRR.

What makes a company a good LBO candidate?

If the exit multiple is lower than the entry multiple, can an LBO still generate strong returns? How?

Should you add back Stock-Based Compensation when calculating Free Cash Flow in an LBO model?

Why might a PE firm use Preferred Stock to fund part of a deal, even though it's more expensive than any form of Debt?