PE Interview Prep Flashcards
Walk me through the income statement.
- Income Statement: shows revenues and expenses over a period of time; used to assess profitability
Revenue
Less: Cost of Goods Sold (COGS)
= Gross Profit
Less: Sales, General, & Administrative (SG&A)
Less: Research & Development (R&D)
= EBIT
Less: Interest Expense
Earnings Before Taxes (EBT)
Less: Income Tax
= Net Income
Net Income if first line on CF Statement
Walk me through the balance sheet.
Assets: The resources with positive economic value that can be exchanged for money or bring positive monetary benefits in the future.
Liabilities: The outside sources of capital that have helped fund the company’s assets. These represent unsettled financial obligations to other parties.
Equity: The internal sources of capital that have helped fund the company’s assets, this represents the capital that has been invested into the company.
Walk me through the cash flow statement.
The cash flow statement summarizes a company’s cash inflows and outflows over a period of time.
The CFS starts with net income, and then then accounts for cash flows from operations, investing, and financing to arrive at the net change in cash.
Operating Activities: Cash flow from company’s core business operations, including sales revenue and expenses
ex: Increase in accounts receivable → Subtract bc more sales on credit, reducing cash collected
Investing Activities: Cash flows related to CapEx and the purchase and sale of long-term assets like property, equipment, and investments.
Cash Flow from Financing Activities: Cash flows related to a company’s capital structure, including issuing or repaying debt, issuing or repurchasing stock, and paying dividends.
What is the purpose of each financial statement?
Income Statement: Profitability - measures the revenue and expenses
Balance Sheet: Financial position (what the biz owns and owes) - measures the assets, liabilities, and equity
Cash Flow Statement: Cash movements - measures inflows and outflows of cash
How are the three financial statements connected?
Income Statement ↔ Cash Flow Statement
Net income on the income statement flows in as the starting line item on the cash flow statement.
Non-cash expenses such as D&A from the income statement are added back to the cash flow from operations section.
Cash Flow Statement ↔ Balance Sheet
The changes in net working capital on the balance sheet are reflected in cash flow from operations.
CapEx is reflected in the cash flow statement, which impacts PP&E on the balance sheet.
The impacts of debt or equity issuances are reflected in the cash flows from financing section.
The ending cash on the cash flow statement flows into the cash line item on the current period balance sheet.
Balance Sheet ↔ Income Statement
Net income flows into retained earnings in the shareholders’ equity section of the balance sheet.
Interest expense on the balance sheet is calculated based on the difference between the beginning and ending debt balances on the balance sheet.
PP&E on the balance sheet is impacted by the depreciation expense on the balance sheet, and intangible assets are impacted by the amortization expense.
Changes in common stock and treasury stock (i.e. share repurchases) impact EPS on the income statement.
Walk me through a DCF
Discounted cash flow (DCF) analysis is a valuation technique to derive the intrinsic value of a company based on projected future cash flows
Forecast a company’s likely future cash flows and then discount them back to present value
- Forecast EBIT
- Calculate EBIAT, then (Add Depr,
Less CapEx, Less Change in NWC) to get to FCF - Calculate the Discount Rate
- Calculate the Terminal Value (Ex. TV in 2017 = FCF 2017 * (1+g) / (r-g))
- Calculate NPV (Enterprise Value) and IRR
- Pursue project if NPV > 0, IRR > Discount Rate
Walk me through an LBO.
- Determine Entry Valuation.
Entry Valuation = LTM EBITDA * Entry Multiple
Entry Multiple is based on
- Market Comparables: Look at the valuation multiples of similar companies (e.g., public comps or recent M&A transactions in the same sector).
- Target-Specific Factors: Adjust for the target company’s growth prospects, profitability, risk profile, or market position.
- Economic Conditions: Consider broader market dynamics, like whether the market is in a bullish or bearish cycle, which impacts multiples.
- Create Sources and Uses of Funds Table: Determine the cost of purchasing the company, and the amount of debt and equity financing required to complete the acquisition.
Uses Side ➝ The total amount of capital required to complete the acquisition
Purchase Enterprise Value (TEV)
+ Transaction Costs
+ Financing Fees
Sources Side ➝ The specific details on how the firm plans to come up with the required funding
Existing Cash
+ Debt
+ Equity (i.e. the equity investment to “plug” the remaining funds required)
- Financial Forecast and Debt Schedule: Create a 3-statement financial model for 5 years along with a debt schedule.
- LBO Exit Returns and Debt Paydown Schedule
(a) Exit Valuation:
Exit Enterprise Value (TEV) = Exit EBITDA * Exit EBITDA Multiple
(b) Debt Paydown: Initial Debt - Cumulative FCF
- Exit Equity Value: Exit Enterprise Value (TEV)–Net Debt
Once we determine the exit equity value, we can estimate the key LBO return metrics, IRR) and MOIC
- MOIC (Multiple on Invested Capital), the ratio of the proceeds of an investment vs. how much you initially invested
= Exit Equity Value÷Initial Sponsor Equity
Ex: MOIC of 2.0x means the investor doubled their money. Higher EBITDA growth and delevering (reducing net debt) boost MOIC.
IRR = MOIC^ (1÷t) –1
IRR is the annualized yield on an investment
- Sensitivity Table
Walk me through a project finance deal.
Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors.
Construction Phase:
- Identify Uses of Capital (Construction, Financing Fees, etc.)
- Identify Sources of Capital (Debt & Equity)
Operations Phase:
- Project Revenue
- Project Opex (Labor, Overhead) and Capex (Construction Costs)
- Schedule Repayment of Debt
- Schedule Interest Payments on Debt
- Schedule Tax Payments
- Calculate CFADS (Cash Flows Available for Debt Service) which is
= Revenue - Expenses - CapEx - Taxes + Change in NWC - Calculate DSCR (Debt Service Coverage Ratio) which is CFADS / Debt Service (aka Interest + Principal)
- Calculate LLCR (Loan Life Coverage Ratio) which is = NPV of CFADS / Debt Balance. This answers the question, at the beginning of the debt paydown period, how many times can the cash flows cover the debt balance over the life of the loan?
CFADS is discounted at cost of debt (interest rate)
RETURNS METRICS
- Evaluate the Equity IRR
Target 15% IRR; the cash flow after paying the debt holders - Evaluate the Project IRR
Target ~10% project return; compares the project’s return to the WACC. If Project IRR > WACC, the project creates value. - Negotiations and Optimizations
Walk me through a PPA / Brookfield wind farm deal.
- ERCOT 2.5-Yr PPA for 200 MW West Texas wind farm
Context:
Negative Covariance Risk: With West Texas being a renewable energy hub, this plant was constantly plagued by negative energy prices due to high supply and low demand
Solution: Fixed-Price PPA
Node-Hub Basis Risk:
Solution: Permitting curtailment when basis is wider than a certain threshold, so long as the hub is below a certain level
Avoiding situations in which hub prices are extremely high and the off-taker has to buy into the market
Client: electric utility with retail load in Texas
- New England 2-Yr PPA for 26 MW wind farm in Maine
Extension of existing contract
- Unfavorable extension clause
- Solution: reduce uncertainty by relationship building, creative deal structures
Replaces 10% of the university’s energy with renewable power
What is enterprise value vs equity value?
Enterprise value is what an entire company is worth and would be how much money is needed to purchase a whole company
Enterprise value = equity value + debt - cash
(In order to buy a whole company, you need to purchase all of its equity, plus any debt, minus cash bc you can use the company’s cash to pay down debt)
Equity value is the value of a company that is owed to equity investors
Equity value = enterprise value - debt
Why is it better to finance with debt vs. equity?
The logic behind why it is beneficial for sponsors to contribute minimal equity is due to debt has a lower cost of capital than equity. One of the reasons the cost of debt is lower is because debt is higher up on the capital structure – as well as the interest expense associated with the debt being tax-deductible, which creates an advantageous “tax shield”. Thus, the increased leverage enables the firm to reach its returns threshold easier.
What are the key drivers and primary levers in an LBO that drive returns?
Key Drivers of Success:
1. Enter at a Low Price
2. Lever with Cheap Debt
3. Improve the Business (Grow EBITDA)
4. Exit at a High Multiple
Key Levers:
1. Deleveraging: Through the process of deleveraging, the value of the equity owned by the private equity firm grows over time as more debt principal is paid down using the cash flows generated by the acquired company.
With less debt and the same total company value, the remaining equity represents a larger portion of ownership.
Equity Value Growth (EquityValue=EnterpriseValue−NetDebt)
- EBITDA Growth: Growth in EBITDA can be achieved by making operational improvements to the business’s margin profile (e.g. cost-cutting, raising prices), implementing new growth strategies to increase revenue, and making accretive add-on acquisitions.
- Multiple Expansion: Ideally, a financial sponsor hopes to acquire a company at a low entry multiple (“getting in cheap”) and then exit at a higher multiple. The exit multiple can increase from improved investor sentiment in the relevant industry, better economic conditions, and favorable transaction dynamics (e.g. competitive sale process led by strategic buyers). However, most LBO models conservatively assume the firm will exit at the same EV/EBITDA multiple it was purchased at. The reason is that the deal environment in the future is unpredictable and having to rely on multiple expansion to meet the return threshold is considered to be risky.
General target returns for infra investing and investment horizon.
12% for Existing Project Finance, 20% for Greenfield
20%, 5-7 yr horizon for LBOs
How do LBO sponors monetize their returns?
Sponsors Hope to Monetize Their Returns by:
- Selling to a strategic acquirer or another PE firm (90%)
- IPO
- Dividend Recapitalization (Sponsor gives themselves a dividend finances by new borrowing; low interest rate environment)
What do Investors Look for in a Good LBO?
- Steady cash flow with little cyclicality
- Minimal ongoing CapEx and working capital needs
- Suboptimal capital structure (low leverage so value from tax savings is not fully realized)
- Business is deemed undervalued in the market / low multiple / company has fallen out of favor
- Strong management teams unchained from public demands (investor pressure)
- If there are subsidiaries that can be sold to pay down debt
Explain Production and Investment Tax Credits, and monetization.
PTC: A tax credit based on the actual electricity produced by a renewable energy project; a fixed dollar amount ($/MWh) of energy generated; available for 10 years after project commissioning.
Rewards production efficiency: Higher output = More tax credits.
Inflation-adjusted annually
Typical for wind projects
ITC: Upfront CapEx-Based Incentive
A tax credit based on a percentage of CapEx (typically 30% of Capex). but can increase under the IRA
One-time benefit, applied in year one after project completion.
Typical for solar projects
Monetization:
Renewable developers often lack enough tax liability to fully use PTCs/ITCs.
They partner with tax equity investors (e.g., banks, institutional investors) who provide upfront capital in exchange for the tax benefits.
Common Monetization Structures:
Transferability → Developers can sell the ITC directly to third parties.
Partnership Flip → Investor owns majority of the project at first, then “flips” ownership to developer after tax benefits expire.
Sale-Leaseback → Developer sells the project to an investor, then leases it back.
What is a GP and LP?
PE firm = General Partner (GP)
LPs (Limited Partners) provide equity to the PE firm to deploy (pension funds, insurance companies, universities, high net worth individuals)
LPs commit capital and the GP (PE firm) charges them an annual management fee of ~2%
20% of the fund’s returns are kept by the GP (“Carry”); remaining 80% given back to LP
Common IRR Approximations
2x Initial Investment in 3 Yrs
2x Initial Investment in 5 Yrs
2.5x Initial Investment in 3 Yrs
2.5x Initial Investment in 5 Yrs
3x Initial Investment in 3 Yrs
3x Initial Investment in 5 Yrs
2x Initial Investment in 3 Yrs = 25% IRR
2x Initial Investment in 5 Yrs = 15% IRR
2.5x Initial Investment in 3 Yrs = 35% IRR
2.5x Initial Investment in 5 Yrs = 20% IRR
3x Initial Investment in 3 Yrs = 45% IRR
3x Initial Investment in 5 Yrs = 25% IRR
If you had to choose two variables to sensitize in an LBO model, which ones would you pick?
The entry and exit multiples would have the most significant impact on the returns in an LBO.
The ideal scenario for a financial sponsor is to purchase the target at a lower multiple and then exit at a higher multiple, as this results in the most profitable returns.
While the revenue growth, profit margins, and other operational improvements will all have an impact on the returns, it is to a much lesser degree than the purchase and exit assumptions.
What does the “tax shield” refer to?
The “tax shield” refers to the reduction in taxable income from the highly levered capital structure.
As interest payments on debt are tax-deductible, the tax savings provides an additional incentive for private equity firms to maximize the amount of leverage they can obtain for their transactions.
Because of the tax benefits attributable to debt financing, private equity firms can be incentivized to not repay the debt before the date of maturity assuming the prepayment is optional (i.e. “cash sweep”).
How is risk mitigated in Project Finance?
- Ring-fenced cash flow through SPV
- Highly contracted
- Gearing (leverage) constraints
What are the key metrics in Project Finance?
- CFADS (Cash Flow Available for Debt Service): the cash flows that senior lenders have claim to
CFADS = Revenue - Expenses - CapEx - Taxes + Change in Net Working Capital
Project finance is raised based off the strength of the project cash-flows. The CFADS expected during a project is the key contributor for determining the debt capacity of the project (“debt sculpting”)
- DSCR = Debt Service Coverage Ratio = CFADS / Debt Service = measure the ability of the project to service its debt through its cash flows
Lenders want project to demonstrate a cash cushion (ability to repay debt and beyond)
Higher revenue risk = higher DSCR - Cash Flow Available for Equity: CFADS - Debt Service
- LLCR: Loan Life Coverage Ratio: # of times that future projected cash flows can repay the outstanding debt balance
LLCR = NPV of Remaining CFADS / Debt Balance
NPV is discounted by Cost of Debt
1x means there’s exactly enough
Total Revenue
- Total Expenses
=Cash Flow Available for Debt Service
Debt Service
Debt Service Coverage Ratio
Cash Flow Available for Equity
What does a typical Project Finance waterfall look like?
In a typical project finance waterfall, the starting line is CFADS, from which debt service is paid out, with the cash-flows remaining split in the hierarchy to other cash uses, for example:
Debt Service Reserve Account (DSRA): = rainy day account. The project relies on its cashflows to repay debt (usually covers 6 months of CFs)
Major Maintenance Reserve Account (MMRA)
Mezzanine or subordinated debt
Lastly, other equity sources including equity investors and shareholder loans
Common types of Project Finance risk
Construction Risk: Cost overruns, planning/consents
Operations Risk: Raw material costs, Operating performance, maintenance cost/timing
Financing Risk: interest rates, commodities markets, FX exposure
Volume Risk: output volume, output price
How does debt sizing work in project finance?
Debt sizing refers to the project finance model mechanics for determining how much debt can be raised to support an infrastructure project.
The amount of debt that can be raised is defined in the debt term sheet and is usually expressed by a maximum gearing (leverage) ratio (e.g. maximum of 75% debt and 25% equity) and a minimum Debt Service Coverage Ratio (DSCR) (e.g. no less than 1.4x). The model then iterates (often using a debt sizing macro) to arrive at the implied debt size.
What is the relationship between CFADS and DSCR?
Cash Available for Debt Service (CADS) is arguably the most important metric in project finance. It determines how much cash is available to all debt and equity investors.
CFADS = Revenue - Expenses - CapEx - Taxes + Change in Net Working Capital
In project finance lenders are paid back solely through the cash flows generated by the project (CFADS) and DCR functions as a barometer of health of those cash-flows. It measures, in a given quarter or 6-month period, the number of times that the CFADS pays the debt service (principal + interest) in that period.
DSCR = CFADS ÷ Debt Service
DSCR is used for two main purposes in project finance:
(1) Sculpting and Debt Sizing
(2) Covenant Testing
Debt Service = CFADS / DCR
What is a good debt service coverage ratio (DSCR)?
Without offtaker: 2x-2.5x
With offtaker: 1.5-1.7x
What does a successful Project Finance deal look like?
- Generates strong financial returns
Project IRR ~10%: project return; compares the project’s return to the WACC. If Project IRR > WACC, the project creates value.
Equity IRR ~15%: return after debt is repaid
- Meets debt obligations (consistent DSCR with no default risks);
DSCR 1.3x-2.5x
LLCR 1.5x-2x
Multiple on Invested Capital (total equity return vs. initial investment) 1.5-3x - Delivers reliable operational performance (high uptime and energy production)
Equity IRR vs. Project IRR
Equity IRR is typically higher than Project IRR in leveraged project finance deals. This happens because of the effect of debt financing (leverage), which reduces the amount of equity invested but allows equity holders to receive a larger share of project cash flows.
- Why Is Equity IRR Higher Than Project IRR?
✅ Leverage Effect – Debt financing allows equity investors to invest less capital upfront while still benefiting from the project’s cash flows.
✅ Higher Return on Equity – If the project generates stable cash flows, the equity investors receive a disproportionate share of the profits relative to their initial investment.
✅ Debt as a Lower-Cost Capital Source – Debt is typically cheaper than equity (lower required return), allowing Equity IRR to exceed Project IRR.
What are typical multiples for wind and solar projects?
Stable, PPA-backed assets trade at higher multiples (12x – 18x).
Merchant risk or older assets trade at lower multiples (8x – 12x).
IRR vs. NPV
IRR = The annualized return a project generates on invested capital.
If IRR > WACC, the project is profitable.
🔹 If I invest $X today, what % return do I get each year?
NPV = The absolute dollar value a project creates after considering the cost of capital.
If NPV > 0, the project is profitable.
🔹 Without NPV, you wouldn’t know if a project makes or loses money in today’s terms.
How do higher/lower discount factors impact NPV and IRR
NPV: Higher discount rate/WACC = lower NPV because future cash flows are worth less today
IRR: If WACC increases, it’s harder for IRR to exceed WACC. If WACC is low, it will be easier for IRR to exceed WACC
So lower WACC is ideal
What is WACC?
A company raises money from two sources:
- Debt (Loans, Bonds) – Cheaper but must be repaid.
- Equity (Investor Money) – More expensive because investors expect higher returns.
WACC blends the cost of both, based on how much debt and equity a company uses.
Increasing debt (leverage) lowers WACC because debt is cheaper than equity and benefits from tax deductions
Capacity Factor vs. Utilization Rate
Capacity Factor = Energy output efficiency.
Utilization Rate = Operational uptime.
Capacity Factor measures Actual Energy Production vs. Maximum Possible
Capacity Factor tells you
- How much energy the solar farm actually produces vs. its theoretical maximum.
- Accounts for weather, sunlight hours, efficiency losses, and maintenance downtime.
Typical Capacity Factors:
- Solar farms: 20% – 30% (since the sun doesn’t shine 24/7).
- Wind farms: 30% – 50% (since wind speeds vary)
Utilization Rate measures Operational Time vs. Downtime
- Measures how often the plant is in operation, regardless of how much power it generates.
- Focuses on equipment uptime and maintenance efficiency.
Time Plant is Operational / Total Available Time
Usually 95%-99%
What is the importance of transmission?
Permitting Delays: Complex and lengthy permitting processes can extend project timelines, hindering the pace of renewable energy adoption.
World Resources Institute
Transmission Bottlenecks: Insufficient transmission capacity can lead to congestion, limiting the integration of new renewable energy projects and affecting grid reliability.
Political landscape
Trump has frozen IRA spending, stopped permitting for offshore wind projects and is pausing federal approvals for onshore wind
Democrats have challenged Trump’s funding freeze and won several federal court rulings, lifting the pause at least temporarily.
Infrastructure Development:
Investments in infrastructure to support fossil fuel extraction and transportation might result in shared benefits for renewable energy projects. For instance, upgrading the electrical grid to accommodate increased fossil fuel production could also enhance the grid’s capacity to integrate renewable energy sources.
Why Glenfarne?
Focus on Grid Stability, Hands-On Advisory, Pragmatic Approach to the Energy Transition
- Focus on Grid Stability
- Renewables combined with peaker plants
- Integration of renewable energy sources necessitates a stable and reliable power grid - Hands-On Advisory
- Glenfarne Group is a developer, owner, operator, and industrial manager of energy and infrastructure assets across the investment-grade Americas, Asia, and Europe.
- More than just a capital investor, Glenfarne Group also provides strategic technical, operational, and administrative expertise to each of its assets, both at the board level, as well as on a day-to-day management basis. - Pragmatic Approach to the Energy Transition - Renewable and LNG
- Magnolia’s OSMR (Optimized Single Mixed Refrigerant) liquefaction technology: enhances efficiency and reduces GHG emissions by 30%
- Texas LNG is “Green by Design” and will be powered by renewable energy driving the facility’s electric motors, making it one of the lowest emitting liquefaction facilities globally.
- Alaska - carbon capture infrastructure
Glenfarne Business Units
- EnfraGen: Solar, hydro, and grid stability assets across Latin America
- Alder Midstream: Energy infrastructure; Texas & Magnolia LNG
- Glenfarne Energy Transition: renewable energy investments
Wind farm optimizations
Maintenance during low-wind periods - minimizing the impact on power generation by taking the turbine offline during times when it would naturally produce less electricity, thereby reducing lost revenue and optimizing overall efficiency of the wind farm operation
Repowers
Curtailment optimization
Cable trades
PTC and ITC monetization
Congestion revenue rights
What does p90 mean?
P90 = there’s a 90% chance that the project will produce more than the specified amount of energy
Walk me through a M&A Deal
- Identify the offer value (multiply the shares outstanding by the offer price per share)
- Determine the transaction structure (i.e. how the buyer will pay for the deal, cash vs. stock).
- Numerous assumptions must then be made regarding the anticipated revenue and cost synergies, the transaction fees paid to investment banks for their advisory services, financing fees, and if the existing debt will be refinanced (or cash-free, debt-free).
- Perform purchase price accounting (PPA). This step adjusts the financial statements to reflect the acquisition. Three key adjustments:
a. Goodwill: The amount paid above the company’s net assets.
b. PP&E Write-Up: Adjusting asset values to reflect true market worth → increases depreciation
c. Deferred Taxes: Records future tax impact from depreciation changes, usually as a liability. - Calculate the standalone earnings before taxes (EBT), i.e. how much the company would have earned before taxes if it had remained independent (before synergies and financing costs are added).
- Calculate the pro forma net income (the “bottom line”).
Now, we calculate how much the combined company will earn after the deal:
Take the standalone earnings (EBT)
Add synergies (savings from merging)
Subtract additional interest expenses (if debt was taken to fund the deal), Subtract taxes, financing costs, etc. - Calculate the pro forma EPS (pro forma net income / pro forma shares outstanding)
- Determine If the Deal is Accretive or Dilutive
Accretive = EPS goes up → The deal adds value for shareholders.
Dilutive = EPS goes down → The deal reduces value for shareholders.
How does a PPA settlement work?
- Wind Farm Delivers Power to ERCOT Grid
- The wind farm generates electricity and injects it into ERCOT at its local node.
- ERCOT pays the wind farm the locational marginal price (Node LMP) for its electricity. - Utility Pays Wind Farm Based on the Fixed PPA Price
- The wind farm sells / the utility pays the fixed contract price ($30/MWh) for each MWh of power produced. - Basis Risk Impact (Difference Between Node LMP and Fixed PPA Price)
- The wind farm’s total revenue depends on both:
a. Fixed PPA payment ($30/MWh) from the utility, and
b. Market-based Node LMP payment from ERCOT
–> If the Node LMP is less than $30/MWh, the wind farm loses money relative to expectations.
- Wind Farm receives $20 from ERCOT
- Wind Farm sells for $30 to off-taker
–> If the Node LMP is greater than $30/MWh, the wind farm earns a bonus margin.
- Wind Farm receives $40 from ERCOT
- Wind Farm sells for $30 to off-taker
What are potential levers you can pull to enhance the value of a project finance deal?
- Highly contracted, both on revenue and expense side
- Debt Repayment Type: Fixed → Annuity
Fixed means declining debt service, while annuity means flat over time.
Annuity results in lower debt service in early years
Increases Equity IRR → More early cash flow for equity.
Decreases minimum DSCR → Smoother payments improve lender confidence. - Longer debt tenor, reduces annual debt service, improving DSCR and freeing up more cash for equity holders.
- Escalating Revenue Structure
Increases Equity IRR → More revenue in later years when debt is lower.
Reduces pressure on early DSCR → Lenders see improved long-term cash flow.
Importance of transmission
If you have power system that relies on solar and wind and you also have way more things electrified you have very uneven demand and supply of power. In order to not have blackouts, you need vastly more grids to connect wind blowing in Iowa with someone plugging their EV in California — much more transmission lines and investments in grids than you would for a fossil-fuel system
Its happening project by project and what’s economical at the project level
3-5x transmission in the US will have to be built
