LBO Modeling Test: Tutorial Overview

Introduction

• Common in private equity and finance interviews
• Simpler scenario compared to detailed full-cell models
• Tests understanding of LBO concepts, information condensation, and LMS determination

Scenario Setup

• Company Details:
  • EBITDA: $250 million, expected to remain flat for 5 years
  • Debt Financing: $750 million at a 10% interest rate
  • Working Capital: Source of funds at $6 million per year
  • Capital Expenditures: $35 million per year
  • Tax Rate: 40%

Key Assumptions

• No Transaction Fees
• Zero Minimum Cash Required
• Constant Net PP&E: Depreciation equals CapEx ($35 million)
• Excess Cash: Not used to repay debt, accumulates on balance sheet

Financial Modeling Steps

Income Statement

1. EBITDA Calculation: $250 million consistently over 5 years
2. Interest Calculation: Annual interest of $75 million (10% of $750 million)
3. Pre-tax Income (EBT): $140 million annually
4. Tax Calculation: $56 million annually (40% of EBT)
5. Net Income: $84 million annually

Cash Flow Adjustments

• Cash Generated Annually: $90 million
  • Net Income: $84 million
  • Add: Depreciation ($35M), Working Capital ($6M)
  • Subtract: CapEx ($35M)
• Debt Balance: Remains $750 million across 5 years

Exit Strategy

• Targeted 3X Multiple of Invested Capital
• Exit Multiple: 6X EBITDA
• Exit Enterprise Value: $1.5 billion (6 X $250 million)
• Equity Proceeds: $1.2 billion

Calculation of Initial Investment

• Equity Investment: $400 million
• Total Purchase Price: $1.15 billion (Equity + Debt)
• Purchase Multiple: 4.6X EBITDA

Conclusion

• Deal Evaluation:
  • Requires multiple expansion for targeted return (from 4.6X to 6X)
  • Expansion required of approximately 33-35%

Final Notes

• Focus on quick calculations and bypass detailed formatting
• Understand core assumptions and logic for efficient problem solving in interviews