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The Technical Interview Guide to Investment Banking, + Website by Paul Pignataro

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CHAPTER 9Leveraged Buyouts Questions

  1. 1) What is a leveraged buyout?

    A leveraged buyout is an acquisition of a company using a significant amount of debt to meet the cost of the acquisition.

  2. 2) Name three core components that contribute to the success of a leveraged buyout.
    1. Cash availability, interest, and debt pay-down
    2. Operation (EBITDA) improvements
    3. Multiple expansion
  3. 3) Name four exit strategies to a leveraged buyout.
    1. Strategic sale
    2. Sale to another financial sponsor
    3. IPO
    4. Dividend recapitalization
  4. 4) What are some characteristics of a company that make a good LBO candidate?
    1. Steady cash flows
    2. Opportunities for earnings growth or cost reductions
    3. A high asset base—collateral to raise more debt
  5. 5) What are the three main steps to conducting a leveraged buyout analysis?
    1. Step 1: Obtaining a purchase price
    2. Step 2: Estimating sources and uses of funds
    3. Step 3: Calculating investor rate of return (IRR)
  6. 6) What is the purpose of a leveraged buyout analysis?

    A leveraged buyout analysis helps determine the annualized returns (IRRs) of an investor's equity investment in a business after a specific time horizon.

  7. 7) Walk me through a leveraged buyout analysis.

    In order to determine the IRR of a particular investment after a certain number of years, one first needs to establish the purchase price of the business. After estimating purchase price, one needs to determine the entire uses of funds (purchase price, net debt, and transaction fees) and the sources used to fund the acquisition ...

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