LBO Modeling / LBO Modelling Exam from Wall Street Prep 2024 PASS A+
What do LBO FCF's tell us? - ✔✔✔ANSWER-Tells you how much cash is available to repay *debt principal* each year after already paying for normal expenses and debt interest
Can a PE firm earn a solid return if it buys a company for $1 billion and sells it for $1 billion 5 years? - ✔✔✔ANSWER-Yes, if it uses a certain amount of debt to purchase the company- if they raise
$500m, and use $500 cash, the company's FCF's are able to pay back the debt and the firm recieved $1 billion in cash at the end (15% IRR)
Let's say that a PE firm borrows $10 million of debt to buy out a company, and then sells the company in 5 years at the same EBITDA multiple it purchased it for. If the PE firm does not pay off any debt during those 5 years, what's the IRR? - ✔✔✔ANSWER-We need *more information*: we only have the EV/EBITDA multiple, and don't know how much EBITDA actually was to calculate an IRR
What is the biggest difference between an LBO and an M&A? - ✔✔✔ANSWER-Unlike an M&A, we're not assuming the PE firm will keep the company long term
What makes a good LBO candidate? - ✔✔✔ANSWER--opportunity to cut costs
-stable cash flows
-good base of assets
-undervalued/low-risk
Walk me through a basic LBO model. - ✔✔✔ANSWER-1. Make assumptions about the Purchase Price and how much debt to use
2. Create a Financial Sources & Uses section
3. Adjust the company's Balance Sheet
4. Project the company's statements and determine how much debt you can pay off each year
5. Calculate the IRR and an EBITDA exit multiple
Why do you focus on Equity value in an LBO? - ✔✔✔ANSWER-You need to acquire all the outstanding shares of a public company
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