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.

What the interviewer is actually testing

A timed paper LBO is never really about testing whether you know what a paper LBO is: by the superday stage, everyone does. It is testing execution under pressure: can you hold five sequential steps in your head, keep the arithmetic internally consistent, and produce a sane number in the time allotted, the way you would need to on a live desk.

The interviewer is watching for three specific things. First, do you follow the skeleton in order (entry, assumptions, FCF, exit, returns) without jumping ahead or skipping the debt-paydown step because it's the most tedious one. Skipping steps under time pressure is the single most common tell of a candidate who has only seen paper LBOs, not internalized them.

Second, do you narrate your process? A silent candidate scribbling numbers gives the interviewer nothing to grade until the final answer, and if the final answer is wrong, there's no partial credit. A candidate who says "okay, entry EV is 8 times 100, so 800; at 5 turns of leverage that's 500 of debt, so entry equity is 300" is giving the interviewer a transcript of their thinking, which is exactly what a real associate does when talking a partner through a quick sensitivity.

Third, do you sanity-check your own output? Elite interviewers deliberately give slightly unusual assumptions (a short 3-year hold, a multiple contraction, a dividend recap mid-hold) specifically to see whether the candidate notices when their answer looks off and re-checks, versus reciting an implausible IRR with total confidence. A candidate who says "that IRR feels high for this deal; let me re-verify the exit debt" is signaling the judgment layer on top of the mechanics, which is what separates a pass from a strong pass.

Common traps

Trap 1: Skipping the free cash flow build and just guessing at exit debt. Under time pressure, candidates often jump straight from entry debt to "and let's say debt is paid down to $200M at exit" without showing any FCF logic. This looks like a guess because it is one.

Say it out loud: "Let me build free cash flow year by year (EBITDA minus roughly estimated interest, taxes, and CapEx) so the debt paydown is derived, not assumed."

Trap 2: Forgetting that interest expense falls as debt is paid down. If you hold interest expense constant at the entry-year level for all five years, you understate FCF (and therefore understate paydown) in every later year. The errors compound.

Say it out loud: "Since debt is amortizing, I'll roughly step down the interest expense in later years rather than holding it flat; otherwise I'm understating free cash flow available for further paydown."

Trap 3: Applying the exit multiple to entry-year EBITDA instead of exit-year EBITDA. A rushed candidate sometimes multiplies the exit multiple by the original EBITDA figure out of habit, which silently drops the entire operational growth story from the answer.

Say it out loud: "Exit EV is the exit multiple times exit-year EBITDA (the grown figure, not the entry figure) since that's what a buyer would be paying for at the end of the hold."

Trap 4: Rounding inconsistently across steps. Rounding $87M to $85M at entry but then using the unrounded $87M × (1+g)^5 at exit creates an internally inconsistent bridge that won't tie if someone checks your work.

Say it out loud: "I'll round to 85 now and carry that rounded figure through the rest of the calculation, so everything stays internally consistent even though it's approximate."

Trap 5: Reciting an IRR without a plausibility check. Producing "47% IRR" for a modestly levered, low-growth deal with a flat exit multiple and not pausing on it is a bigger red flag than a small arithmetic slip: it suggests the candidate doesn't have a feel for what LBO returns actually look like.

Say it out loud: "That comes out to roughly 47%, which is unusually high for this leverage and growth profile; let me re-check whether I mis-stepped the debt paydown."

Trap 6: Ignoring transaction fees and minimum cash in sources & uses. In the interest of speed, candidates often drop financing fees, advisory fees, and a minimum cash requirement entirely from the entry equity check, which slightly understates the actual sponsor investment (and therefore slightly overstates MoIC).

Say it out loud: "For speed I'm ignoring transaction fees and minimum cash, which will overstate the return slightly versus a full model, worth flagging."