LBO Interview Questions

LBO questions decide the hardest interviews, especially anywhere private equity is in the conversation. These cover the model's mechanical flow, sources and uses, debt schedules, and the returns math behind IRR and MOIC.

21 questions

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Superday-level questions with full model answers.

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Explain why debt paydown is a real source of equity value creation even when it requires no operational improvement to the business at all.
  • Name the three return drivers in an LBO and explain, in your own words, what each one represents economically.
  • Why does using leverage amplify equity returns even when it doesn't change the underlying dollar amount of enterprise value created?
  • Why are sophisticated LPs skeptical of a PE deal thesis that relies heavily on multiple expansion to hit its target return?
  • A company is bought at $400mm EV, 8.0x EBITDA ($50mm), funded with $160mm equity and $240mm debt. At exit, EBITDA is $60mm, the multiple is 8.0x, and net debt is $150mm. Build the three-driver bridge and compute MoIC.
  • Explain why a 1x change in the entry multiple typically has a larger effect on IRR than a full turn of additional leverage or several points of margin improvement.
  • Describe how you would determine, after the fact, whether a fund's multiple expansion on an exit was genuinely earned through the sponsor's actions versus simply market-driven luck.
  • A sponsor targets a 3.0x MoIC over 5 years on a $180mm equity check. Entry EV is $600mm at 9.0x EBITDA, funded with $180mm equity and $420mm debt. If the exit multiple holds flat and net debt is paid down to $250mm, solve for the required exit EBITDA and the implied cumulative EBITDA growth.
  • A deal is bought at 7.0x EBITDA of $80mm with $250mm equity and $310mm debt. Midway through the hold, a covenant breach forces a $40mm dilutive equity injection. At exit, EBITDA has grown to $95mm, the multiple has compressed to 6.0x, and net debt (after the injection helped pay it down further) is $180mm. Compute MoIC on total capital invested and explain how the covenant breach and multiple compression interacted to affect the outcome.
  • Compare two hypothetical exits of the same platform company: Exit A shows EBITDA growth from $40mm to $70mm with the multiple compressing from 9.0x to 7.5x; Exit B shows EBITDA flat at $40mm with the multiple expanding from 9.0x to 12.0x. Both have identical entry/exit net debt. Compute the equity value created under each and discuss which deal thesis a sophisticated LP would view as higher quality, independent of which produces the larger dollar return.
Why must total sources equal total uses in an LBO, and is this an accounting identity or a real economic constraint? Explain the difference.
  • List every standard line item on the uses side and the sources side of an LBO sources & uses schedule, in the order you would present them.
  • What does 'cash-free, debt-free' mean, and why do most LBOs use this convention when structuring the purchase price?
  • Why does management rollover equity reduce the sponsor's required cash equity check, and why do sponsors generally want management to roll over a stake?
  • Purchase price is $350mm enterprise value with existing net debt of $40mm (cash-free, debt-free). New debt is a $150mm term loan and $70mm of high yield notes. Financing fees are 2% of new debt, other fees are $9mm. Compute the required sponsor equity check.
  • Explain the difference between the face value of a debt tranche and the actual net cash proceeds it generates when issued at an original issue discount (OID), and why this distinction matters for building an accurate sources & uses schedule.
  • Why is the revolver typically shown in the sources & uses schedule as available but undrawn at close, and what would it mean, from a risk perspective, if a deal required a fully drawn revolver on day one?
  • Enterprise value is $900mm with existing net debt of $70mm. New debt: a $70mm revolver (undrawn), a $320mm term loan B issued at 97 OID, and $220mm of senior notes at par. Financing fees are 2.25% of new debt face value (excluding the undrawn revolver), legal/advisory fees are $22mm, and management rolls $50mm. Compute the required sponsor equity check, being explicit about how you treat OID and the undrawn revolver.
  • Using the deal in the prior question, the lead arranger later tells you the term loan B market will only clear $280mm face value at the same 97 OID. Recompute the sponsor's equity check assuming the sponsor absorbs the entire cash shortfall itself, and state the percentage increase in the sponsor's required equity.
  • A target has $45mm of cash, of which $18mm sits in a foreign subsidiary and cannot be repatriated without a 25% tax cost. Enterprise value is $600mm and existing debt is $90mm. Compute the equity purchase price two ways: (a) naively crediting the buyer for all $45mm of cash, and (b) correctly crediting only the freely available cash plus the after-tax value of the trapped cash. Quantify the difference in the required equity check.
What is the difference between Term Loan A and Term Loan B in terms of buyer base, amortization, and covenant package?
  • List the standard tranches of an LBO debt stack from most senior to most junior, and explain what determines the ordering.
  • Why is the revolver typically undrawn at close, and what type of covenant does it usually carry that the rest of a cov-lite stack does not?
  • What is an equity kicker on a mezzanine tranche, and why would a lender accept one instead of demanding a higher pure cash coupon?
  • Explain the difference between maintenance covenants and incurrence covenants, and why covenant-lite structures have become dominant in leveraged loan markets.
  • A debt stack has $100mm TLA at 5.5%, $180mm TLB at 7.75%, and $120mm high yield notes at 10.0%. Compute the blended cost of debt.
  • Explain what a PIK toggle is, why a company might elect to PIK interest during a downturn, and what it costs the company to do so even though no cash interest is paid in the near term.
  • A term loan structure has TLA of $120mm amortizing at 8%/year mandatory and TLB of $250mm amortizing at 1%/year mandatory. Free cash flow available for sweep after mandatory amortization is $55mm at a 75% sweep rate, applied to TLA first per the credit agreement waterfall. Compute total TLA and TLB paydown in the year.
  • A company has $150mm of mezzanine debt with an 11% cash coupon or 13% PIK coupon. It elects to PIK for two years before returning to cash-pay. Compute the mezz balance after the two PIK years, the cash interest paid in year 3, and compare cumulative cash interest paid over 3 years to a counterfactual where the company paid cash throughout. Quantify the incremental principal owed at exit due to the PIK election.
  • Two debt stacks raise the same $600mm at 5.0x EBITDA of $120mm. Structure A: $300mm TLA at 5.5%, $200mm TLB at 7.5%, $100mm HY at 9.5%. Structure B: $100mm TLA at 5.5%, $200mm TLB at 7.5%, $300mm HY at 9.5%. Compute the blended cost of each and the dollar difference in annual interest expense, and explain what this difference implies for each structure's debt paydown return driver over a 5-year hold.
Describe the mechanical flow of an LBO operating model from revenue down to levered free cash flow, naming each line item in order.
  • Why is interest expense in an LBO model circular, and what are two practical ways to resolve that circularity in Excel?
  • Why does the LBO operating model compute cash taxes on a levered basis (EBIT less interest expense) while a DCF computes them on an unlevered basis?
  • Name two LBO-specific line items that a standard three-statement model for a stable public company would not typically include, and explain what each represents.
  • Year 4 EBITDA is $58mm, D&A is $14mm, interest expense is $19mm, CapEx is $9mm, NWC increase is $2mm, and the tax rate is 25%. Build the levered free cash flow for the year.
  • Explain why the sequencing of sources & uses before the operating model matters, and what specifically the operating model needs from sources & uses to run.
  • A company has pre-deal NOLs of $20mm. Year 1 taxable income (pre-NOL) is $15mm. Compute cash taxes paid in year 1 and the remaining NOL balance entering year 2, and explain how this changes the year's levered free cash flow versus a model that ignored the NOL.
  • Beginning term debt is $180mm at 8.0%. Levered free cash flow before interest and tax (EBITDA less D&A, capex, and NWC change) is $50mm, tax rate is 25%, and all after-tax cash sweeps to debt. Solve for interest expense using the average-balance method (set up and solve the circular equation), and compare it to the naive beginning-balance-only estimate.
  • A target has $40mm of pre-deal NOLs. Purchase accounting creates $50mm of incremental intangible write-up amortized over 10 years on top of $8mm of pre-existing D&A. The sponsor charges a 2% of EBITDA management fee. Year 1 EBITDA is $45mm, interest expense is $15mm, CapEx is $6mm, NWC increase is $1mm, tax rate 25%. Build levered free cash flow for year 1, showing the NOL's cash tax impact, and state the remaining NOL balance entering year 2.
  • The sponsor is deciding between two operating plans for the same platform: Plan A assumes 4% annual revenue growth with flat margins; Plan B assumes flat revenue but 300bps of cumulative margin expansion over 5 years from cost cuts, funded by $15mm of one-time restructuring cash costs in year 1 (a use of cash not reflected in EBITDA). Starting revenue and EBITDA are $150mm and $30mm respectively. Project EBITDA under both plans through year 5, incorporate the year 1 cash cost's effect on free cash flow (not EBITDA) for Plan B, and discuss which plan you would expect to produce a better return given the debt paydown driver from Lesson 27.
Walk me through a debt schedule from free cash flow to ending debt balances. Name each step in order.
  • What is a cash sweep, which tranches does it apply to, and in what order? Why are high-yield bonds excluded?
  • A company has $40M of FCF before debt paydown, a $250M TLB with 1% mandatory amortization, and a 100% sweep. What is the ending TLB balance?
  • What role does the revolver play in an LBO model, and what happens to it in a year of negative free cash flow?
  • Explain why an LBO model contains a circular reference and describe two ways to resolve it, including the trade-off of each.
  • A mezzanine note has a 6% cash / 6% PIK coupon on a $100M balance. Walk through the impact on the income statement, cash flow available for debt paydown, and the debt rollforward this year.
  • A credit agreement sets the excess cash flow sweep at 50% above 4.0x net leverage, 25% between 3.0x and 4.0x, and 0% below 3.0x. Why do lenders structure step-downs this way, and how does it change late-year deleveraging in your model?
  • Year 3: EBITDA $90M, cash interest $28M, cash taxes $12M, capex $22M, working capital build $8M. Mandatory amortization is $5M and minimum cash is already funded, with a 100% sweep and $15M drawn on the revolver. Compute the sweep and allocate it across the revolver and a $310M TLB.
  • A $120M holdco note PIKs at 11% while consolidated EBITDA grows 4% per year and the opco TLB is swept with all excess cash. Under what condition does total leverage still rise, and roughly how many years until the PIK note doubles? What does this imply for the exit equity check?
  • Your model computes TLB interest on beginning-of-period balances. The TLB starts the year at $500M and ends at $380M with an 8% rate. Quantify the interest overstatement versus the average-balance method, trace its effect through taxes (25% rate) to FCF, and state the direction of the error in the sweep and in exit equity.
Define IRR and MoIC. Which is time-weighted, and why does a fund need to look at both?
  • You invest $150M and receive $450M after five years with no interim cash flows. Compute the MoIC and approximate the IRR without a calculator.
  • Using the Rule of 72, approximately what IRR doubles your money in four years? In six years?
  • A deal returns 2.0x. State the approximate IRR if the hold is 3 years and if it is 7 years, and explain why they differ.
  • A sponsor takes a $75M dividend recap in year 2 of a deal and exits in year 5. Explain the effect on MoIC and on IRR, and why they diverge.
  • Explain the reinvestment-rate assumption embedded in IRR and describe a situation where it materially overstates the economics of a deal. What alternative metric addresses it?
  • Why can a portfolio of quick 1.3x exits show a higher IRR but be a worse fund than a portfolio of 2.5x exits over five-year holds? Which metrics would an LP use to see through this?
  • Entry equity $350M. You receive a $120M dividend at the end of year 2 and $700M at exit at the end of year 5. Compute MoIC and estimate IRR to within a point or two, showing your iteration.
  • A deal exits at 2.6x after 4 years. The exit then slips to year 6 at the same dollar proceeds. Quantify the IRR in both cases, and compute roughly how much larger the year-6 proceeds must be to restore the year-4 IRR.
  • A fund uses a subscription line to delay capital calls by one year on a deal that returns 2.0x over what would otherwise be a 5-year LP hold. Estimate the reported IRR with and without the facility, name the costs the headline number hides, and explain how an LP should adjust.
Using the MoIC-to-IRR approximation, roughly what IRR corresponds to a 2.5x MoIC over 5 years? A 2.0x MoIC over 3 years?
  • List the five inputs you need before starting a paper LBO, and explain why asking for a missing one is better than assuming it.
  • EBITDA is $60M, entry multiple is 7x, and leverage is 4x EBITDA. What is the entry enterprise value, entry debt, and sponsor equity check?
  • Walk through why a paper LBO simplifies the debt schedule down to a single FCF assumption rather than a full mandatory-amortization-plus-sweep waterfall.
  • Entry EBITDA $75M at 8x, 4.5x leverage. EBITDA grows to $100M over 5 years, exit multiple is 7.5x (a half-turn contraction), and cumulative debt paydown is $150M. Compute MoIC and estimate IRR.
  • Explain what happens to the return decomposition once debt is fully retired mid-hold and the remaining free cash flow simply accumulates as cash. Does this help or hurt the equity return, and why is it categorized differently from 'deleveraging'?
  • A fund needs a 3.0x MoIC over 4 years. If EBITDA doubles over the hold and the exit multiple equals the entry multiple, what does that imply about how much debt must be paid down, assuming entry leverage of 5x EBITDA on $90M of entry EBITDA? Set up (but don't necessarily fully solve) the equation you'd use.
  • Reverse paper LBO: the fund requires a 2.8x MoIC over 5 years. Entry EBITDA is $95M, growing to $133M at exit. Leverage is capped at 5x EBITDA, exit multiple is fixed at 8.0x, and the debt schedule retires $280M of debt over the hold. Solve for the maximum entry EV/EBITDA multiple, ignoring fees.
  • You compute a 2.6x MoIC over 5 years but the interviewer then says the deal actually closed 8 months late relative to your assumed entry date, compressing the hold to 4.33 years with the same exit equity value. Explain qualitatively (no need for exact math) which direction IRR moves and why, referencing how IRR treats non-integer hold periods.
  • A candidate tells you they always assume the exit multiple equals the entry multiple by default. Critique this habit: when is it a reasonable default, and what specific interview cue should prompt them to challenge it rather than just apply it silently?
Explain the difference between interest coverage and the fixed charge coverage ratio. Why can a company look safe on one and tight on the other?
  • Define total leverage, net leverage, and first-lien leverage. Why might a deal be quoted at a lower multiple in headlines than a naive total-debt-over-EBITDA calculation would suggest?
  • A company has $90M EBITDA, $20M cash, $200M TLB, and $150M senior notes. Compute total leverage and net leverage.
  • What is the practical difference between a maintenance covenant and an incurrence covenant, and which is more common in a cov-lite term loan B?
  • A capital structure has 3.5x first-lien leverage and 6.5x total leverage. What does the 3.0x gap tell you about the risk profile of the first-lien tranche, and how would you expect that tranche to be priced relative to the subordinated debt?
  • A company's GAAP EBITDA is $80M but its credit-agreement EBITDA with add-backs is $105M, against $500M of debt. Compute leverage both ways and explain why a credit investor should care about the difference.
  • A maintenance covenant caps net leverage at 5.5x. The company is currently at 4.8x with $110M EBITDA and net debt of $528M. How much can EBITDA fall (holding debt constant) before the covenant is breached? Express the answer both in dollars and as a percentage decline.
  • A subordinated note is a cash/PIK toggle currently paying cash. EBITDA is expected to fall 20% next year due to a demand shock. Explain, with the mechanics, how flipping the note to full PIK would affect interest coverage versus total leverage in opposite directions, and whether you'd recommend the company do it.
  • Year 1: EBITDA $100M, net debt $550M (5.5x). The covenant steps down from 6.0x to 5.25x in year 2. Base case: EBITDA grows 6% and $35M of debt is paid down. Compute year 2 leverage under the base case, then under a downside where EBITDA instead falls 10% and debt paydown slows to $10M. Does the covenant hold in the downside?
  • Explain what a cross-default provision is and why it means credit stats for one tranche can't always be analyzed in isolation from the rest of the capital structure.
Explain why management rollover is classified as a source of funds rather than a use, and how it changes the sponsor's required equity check.
  • Purchase price is $600M, management is owed $70M and rolls $20M, debt is $380M, fees are $8M. Compute the sponsor's required equity check and the post-close ownership split.
  • What is a dividend recapitalization, and why does it barely change MoIC while significantly boosting IRR?
  • A sponsor invests $350M for 100% of equity, then grants a 12% fully-vested MIP pool immediately at close. At exit, total equity value is $1,050M. Compute the sponsor's MoIC with and without the pool, and quantify the cost of the pool in MoIC terms.
  • Describe how a ratchet-style MIP structure ties management's payout to the fund's return, and explain why sponsors prefer this over a flat, unconditional grant.
  • A company does a dividend recap in year 2, raising $100M of new debt at 8% interest, fully distributed. Explain the two ways this reduces exit equity value versus a no-recap counterfactual, beyond the mechanical increase in net debt.
  • Why do credit agreements typically restrict the size and timing of dividend recaps, and what covenant mechanisms are used to do this?
  • Sponsor invests $300M in year 0. In year 3, a recap distributes $180M. In year 6, the sponsor sells its remaining equity for $260M. Compute MoIC. Then explain qualitatively (no need to solve a full IRR) why this deal's IRR is meaningfully higher than a same-MoIC deal with all $440M received in year 6.
  • A sponsor has already recapped out cash equal to 100% of its original equity check via two dividend recaps. It still owns 70% of the company. At exit, its 70% stake is worth $310M. What is the sponsor's MoIC on remaining invested capital, and what term describes this kind of position? Explain the mechanics that make this possible.
  • A deal has rollover management (9% of equity), a tiered MIP pool (8% if sponsor MoIC is 1.5x–2.5x, 14% above 2.5x, 0% below 1.5x), a mid-hold recap, and a final sale. Walk through, in order, every step required to compute the sponsor's final realized MoIC, being explicit about which cash flows the MIP pool does and does not participate in.
Explain the difference between organic EBITDA growth, acquired EBITDA at cost, and multiple arbitrage, and why an LP would want a platform's return decomposed across all three.
  • Define multiple arbitrage in a buy-and-build strategy and explain, conceptually, why smaller businesses trade at lower multiples than the platforms that acquire them.
  • A platform is valued at 8.0x EBITDA. It buys an add-on with $5M of EBITDA for $30M. Compute the add-on's purchase multiple and the multiple arbitrage captured.
  • A platform funds an add-on entirely through an accordion facility with no new sponsor equity. Explain why this makes the add-on's marginal IRR contribution disproportionately large, and what risk this financing choice adds to the deal.
  • Platform EBITDA is $45M at 5.0x leverage ($225M debt); the credit agreement caps pro forma leverage at 6.0x. The sponsor wants to buy a $9M-EBITDA add-on at 6.5x. Compute available accordion capacity and determine how much (if any) new sponsor equity is required.
  • Why can quality-of-earnings adjustments matter disproportionately for add-on acquisitions compared to platform-level deals, and how does an unadjusted headline EBITDA number distort the calculated multiple arbitrage?
  • Describe two structural reasons a buy-and-build strategy's addressable pipeline of add-ons is finite, and how a sponsor should account for this when underwriting fund-level returns.
  • A platform enters at $35M EBITDA and 9.0x. Over the hold it completes three add-ons: $6M EBITDA at 5.5x, $9M EBITDA at 6.0x, and $11M EBITDA at 7.0x, while organic EBITDA grows to $50M. Exit multiple is flat at 9.0x. Compute total exit EBITDA, exit EV, and decompose the EV growth into organic growth and multiple arbitrage for each add-on.
  • Using the same deal as above, suppose diligence later reveals the $11M-EBITDA add-on's true run-rate EBITDA was only $8.5M (the rest was a one-time contract). Recompute that add-on's effective purchase multiple, its true multiple arbitrage, and restate total exit EBITDA and exit EV accordingly.
  • A sponsor invests $150M of equity in a platform at $40M EBITDA and 9.5x. Over 5 years it completes four debt-funded add-ons adding $30M of EBITDA at an average 6.0x, while organic EBITDA grows from $40M to $55M. At exit, the buyer, citing integration risk across the four add-ons, pays only 8.0x instead of the underwritten 9.5x. Compute exit EV and equity value under both multiples (assume exit net debt of $200M in both cases), and quantify how much of the MoIC difference is attributable to multiple compression versus the underlying EBITDA growth being unaffected.
Explain why debt paydown increases equity value even though enterprise value is unchanged by it.
  • Name the three classic drivers of the value-creation bridge and state, in one sentence each, why LPs weight their quality differently.
  • A deal enters at 7.5x on $200M EBITDA with $900M of debt and exits at 7.5x on $260M EBITDA with $550M of net debt. Build the bridge and confirm it ties to the equity gain.
  • What is the cross term in a value-creation bridge, why does it exist, and what are the two standard conventions for allocating it?
  • Entry: $90M EBITDA at 8.0x, $430M debt. Exit: $120M EBITDA at 9.5x, $250M net debt. Compute the bridge under BOTH cross-term conventions and quantify the difference in the 'operational' bar.
  • A sponsor's fundraising deck shows a bridge where 70% of value creation is labeled 'EBITDA growth.' As an LP, list three specific adjustments or re-cuts you would perform before accepting that number.
  • Why is leverage not shown as a fourth bar of enterprise-value creation, and how would you quantify its contribution to the equity return instead?
  • Entry: $120M EBITDA at 9.0x, 60% debt. Year 2: $150M dividend recap. Exit year 5: $160M EBITDA at 9.0x, exit net debt $560M. Bridge to total proceeds, compute MoIC, and explain what the recap did to IRR versus MoIC.
  • A platform is bought at 11.0x on $50M EBITDA ($330M debt). It acquires $30M of add-on EBITDA at 7.0x (fully debt-funded) and grows organically to $95M total EBITDA by exit at 11.0x with $400M net debt. Build a four-bar bridge separating organic growth, multiple arbitrage, multiple expansion, and paydown, then state what a naive two-bar bridge would have overstated.
  • Two funds each report 2.4x on comparable deals. Fund A: EBITDA +80%, multiple flat, modest paydown, sector comps flat. Fund B: EBITDA +15%, multiple from 8x to 11x while sector comps went 8x to 10.5x, heavy paydown. Decompose the quality of each return, isolate company-specific multiple expansion for Fund B, and argue which fund you would re-up with.
Why is an LBO analysis described as the 'floor' of a valuation football field, and what does the analysis actually solve for?
  • Give three structural reasons a strategic acquirer can usually justify a higher price than a financial sponsor for the same asset.
  • A strategic pays 11.0x headline on $200M of EBITDA and expects $40M of run-rate synergies. What is its effective multiple on synergized EBITDA?
  • Why do disciplined sponsors underwrite the exit multiple flat to entry in the base case, and when is underwriting expansion defensible to an investment committee?
  • Target: $120M EBITDA growing to $160M in year 5. Lenders offer 5.5x leverage; the model repays 50% of debt; exit at a flat 10.0x; hurdle 2.0x. Compute the sponsor's maximum entry multiple.
  • List four concrete situations in which a sponsor outbids all strategic buyers, and explain the economic mechanism in each.
  • Explain why LBO purchase multiples across the whole market rise when credit conditions loosen, using the ability-to-pay equation.
  • A sponsor bought at 12.0x when sector comps averaged 9.5x long-run. EBITDA is underwritten to grow 60% over 5 years with 40% debt paydown from 6.0x entry leverage. Underwrite exit at 10.0x and compute the MoIC, then state whether the deal clears a 2.0x hurdle and what single assumption the IC will attack first.
  • Rates rise 300bps: leverage capacity falls from 6.0x to 4.5x and sponsor hold periods extend from 5 to 6 years at an unchanged 20% IRR target. Quantify (with your own illustrative numbers) how each effect changes a sponsor's maximum ability-to-pay, and explain why auctions tilt toward strategics in tightening cycles.
  • A platform sponsor with $10M of immediate cost synergies competes against a pure sponsor (identical terms: 6.0x leverage on relevant EBITDA, 2.25x hurdle, 40% paydown, flat 9x exit, target standalone EBITDA $50M growing 8%/yr for 5 years). Compute both bidders' maximum prices and explain why buy-and-build lets sponsors bid like strategics.
Why does IRR rise for the same MoIC when the hold period shortens? Use the 2.0x/5-year and 2.0x/3-year benchmarks in your answer.
  • List the five sequential steps of the paper LBO skeleton in order, and state which single step candidates most often skip under time pressure.
  • Entry: 7.0x on $50M EBITDA, 4.5x leverage. 5-year hold, EBITDA grows to $75M, flat exit multiple, assume cumulative FCF paydown of $100M. Compute entry equity, exit equity, and MoIC.
  • Explain why holding interest expense flat across the hold period (instead of stepping it down as debt amortizes) causes a paper LBO to understate the exit equity value.
  • Entry: 9.0x on $70M EBITDA, 5.0x leverage, 8% cost of debt, 25% tax rate. EBITDA grows 10%/year for 4 years, flat exit multiple. Approximate FCF each year as (EBITDA − interest) × (1 − tax rate), stepping down interest as debt amortizes. Compute MoIC.
  • An interviewer gives you an exit multiple a full turn below entry. Explain in under 30 seconds (as you would out loud) why this doesn't necessarily mean the deal is bad, and what it does to the composition of the return.
  • Why should a candidate verbally flag their rounding and simplifying assumptions during a timed drill rather than silently applying them?
  • Entry: 8.0x on $100M EBITDA, 5.0x leverage. Year 3 dividend recap of $50M funded by new debt. Exit year 5: EBITDA $140M, multiple flat at 8.0x. Cumulative paydown-available FCF (ignoring recap) is $120M over 5 years, roughly straight-lined. Compute total proceeds, MoIC, and explain qualitatively how the recap affects IRR versus a no-recap case with the same total MoIC.
  • Entry: 8.5x on $80M EBITDA, 5.5x leverage, management rolls 10% of entry equity. Years 1-2 require heavy growth CapEx limiting FCF to $8M/year each year; EBITDA grows from $80M to $150M by year 5 with growth back-loaded ($84M, $90M, $110M, $130M, $150M); FCF resumes at $40M/$50M/$60M in years 3-5. Exit multiple flat at 8.5x. Compute sponsor MoIC at both a 3-year and 5-year exit, and explain which exit a fund nearing the end of its life might prefer despite the lower absolute dollar gain.
  • A candidate under time pressure produces a 46% IRR for a deal with 5.0x leverage, flat exit multiple, and only modest (15%) EBITDA growth over 5 years. Explain why this result should trigger a self-check, identify the most likely arithmetic error, and state what the corrected IRR range should roughly look like.
Explain why credit stats should be understood as forward-looking constraints on sponsor actions (recaps, add-ons) rather than purely backward-looking scorecard metrics.
  • State the three-part mental model (what went in/out, what changed and why, what constraints governed it) that unifies every LBO question in this module, and give one example lesson topic mapped to each part.
  • Entry: Debt $480M, EBITDA $120M (4.0x leverage). Year 1 FCF swept: $50M; EBITDA grows to $130M. Compute the new leverage ratio and state how much covenant headroom remains against a 5.5x maintenance covenant.
  • A company's maintenance covenant is tested quarterly on a trailing-twelve-month basis. Explain why a single seasonally weak quarter is unlikely, by itself, to trigger a covenant breach, and describe the scenario where it would.
  • Platform entry: 9.0x on $100M EBITDA, 4.5x leverage. By year 3, organic EBITDA is $120M and debt is $380M. An add-on with $20M EBITDA is bought at 6.0x, funded entirely with new debt. Compute pro forma leverage before and after the add-on, and explain the multiple-arbitrage value created.
  • Two exit options on the same deal: 2.4x MoIC at year 3, or a projected 3.3x MoIC at year 5. Compute the incremental annualized IRR on staying in for the extra two years, and explain what fund-level consideration (beyond the math) would drive the choice between them.
  • Name the three paper-LBO shortcuts from the timed-drill lesson that a real operating model would need to replace with tranche-level detail, and explain what breaks first under a growth-CapEx stress case.
  • Entry: 8.0x on $90M EBITDA, TLB at 4.5x leverage, management rolls 12% of total equity. Over years 1-3, EBITDA grows to $115M and the TLB is paid down from $405M to $290M via cash sweep. At year 3, leverage against a 6.0x covenant permits a $180M dividend recap via new HY debt. Compute pro forma leverage immediately post-recap and confirm it remains inside covenant.
  • Continuing the same deal: after the year-3 recap (debt now at 290 + 180 = 470, EBITDA 115), the company grows EBITDA to 155 by year 5 and pays down debt via sweep to 410. Exit multiple is flat at 8.0x. Compute total proceeds (exit equity plus the year-3 dividend), sponsor MoIC (net of the 12% management rollover, no further dilution), and identify all three value-creation sources contributing to the return.
  • An interviewer walks you through a five-part chained scenario (entry equity, then an add-on's effect on leverage, then a covenant test, then a recap, then exit MoIC) and at part 2 you realize your part-1 entry equity figure was off by $20M. Describe exactly how you should handle this out loud, and why silently continuing with the wrong number is worse than pausing to correct it.