LBO

Question 1

Leverage ratio =?

Answer 1

Debt / ebitda

Question 2

Interest coverage ratio =?

Answer 2

EBITDA / Interest expense

Question 3

Principal repayment for high yield debt vs bank debt

Answer 3

Bank debt has principal repayment whereas HY does not

Question 4

Collateral for high yield debt vs bank debt

Answer 4

HY- no
Bank- yes

Question 5

Go through steps on CFDF basis for transaction for seller and buyer
EBITDA = 100
Multiple = 10x
Cash = 25
Operating cash =5
Debt = 200

Answer 5

Seller received EV.

1.Purchase price = EV = $1bn
2. Buyer owns excess cash and debt. Takes $1bn and pays off $180 of net debt
3. Buyer walks away with $820

Question 6

Go through steps on not CFDF basis for transaction for seller and buyer
EBITDA = 100
Multiple = 10x
Cash = 25
Operating cash =5
Debt = 200

Answer 6

Seller received equity value

1. EV = $1bn. Purchase price aka equity value = $1bn - $180 of net debt = $820
2. Buyer walks away with $820

Question 7

FCF=?

Answer 7

Tends to exclude debt repayment (bc goal is to look at how much cash is available for that)

=NI + DA + stock based company - increase NWC - capex

Question 8

Exit multiple range compared to acquisition multiple

Answer 8

The same or a little below

Question 9

IRR if you double money in 5 years

Answer 9

15%

Question 10

IRR if you triple money in 5 years

Answer 10

25%

Question 11

IRR if you double money in 3 years

Answer 11

26%

Question 12

IRR if you triple money in 3 years

Answer 12

44%

Question 13

IRR if you triple money in 3 years

Answer 13

44%

Question 14

Walk through basic LBO

Answer 14

1) assume purchase price, debt/equity, interest rate, other (e.g. revenue growth, margins, etc)
2) create sources and uses to see how much investor equity is required
3) allocate purchase price to create new balance sheet
4) project company’s 3 FS and determine cash flow and how much debt is paid off each year
5) assume exit multiple and calculate final return to the firm

Question 15

Purchase price allocations steps

Question 16

Does PPE write down cause DTA or DTL?

Answer 16

DTA

Question 17

GP and LP. Who is who and who pays a fee?

Answer 17

LP- investors
GP- PE

LP pay management fee ~1.5% to 2% of committed capital

Portfolio company also pays fees to GP (usually shared with LP)

Question 18

PE firms keep how much of funds returns and what’s it called

Answer 18

15-20%
Promote or carried interest

Question 19

Number of investments in a fund

Answer 19

~10

Question 20

How much do GP usually commit for capital?

Answer 20

1-5%

Question 21

Capital call?

Answer 21

Draw down from LPs on a pro rata basis once investment is made

Commuted capital is not drawn immediately but as needed, but it is legally binding

Question 22

Hurdle rate

Answer 22

7-10% cumulative return prior to manager

Question 23

Distribution waterfall - 4 stages

Answer 23

1) Return of capital (including some fees and expenses)
2) pref return: based on hurdle rate or whatever is left from gross proceeds
3) catch up: given all / major portion of gain until receive certain % of profits (what is left after capital return and pref return). E.G. is $100 * (1-20%)- $100
4) carried interest: remaining allocation between LP and GO

Question 24

Best practice exit multiple to use…

Answer 24

Same as current multiple

Question 25

M&A / LBO
Do you assume these auto vest? Options, RSU

Answer 25

Options and warrants: yes for outstanding and exercisable using treasury stock method

RSUs: yes for all

Question 26

If you have extra CF what is the order of repayment

Answer 26

Revolver : use if short on repaying other debt’s mandatory repayment. Otherwise repay first if extra CF
Existing debt
Term loans
Senior notes

Question 27

Walk through affects on FS for $100M debt, 5% cash interest, 5% PIK interest, and 10% amortization

Answer 27

I/S: 10 interest expense and 6 after tax assuming 40% T
CFS: add back 5 in CFO for PIK interest (non cash) so net -1 in CFO. Pay down 10 in CFF. Total 11
B/S: cash down 11, debt down -10, add 5 for PIK, and -6 in RE to balance at -11

Question 28

Sources and uses buckets for CFDF deals

Answer 28

Sources: debt + equity

Uses: enterprise value + transaction fees + min cash after close

Question 29

Sources and uses buckets for non CFDF deals

Answer 29

Sources: new debt, assumed debt, excess cash, equity

Uses: seller’s equity, assumed and refinanced debt, transaction fees