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109 09 LBO Model Assessment Center Case Answers PDF

This document provides a case study for building a leveraged buyout model to answer questions about cash-on-cash multiples and IRR under different exit scenarios. It includes assumptions about the company's financials, purchase price, capital structure, and exit multiples. The case study then asks six questions requiring the use of the model to calculate purchase prices, IRRs, and cash-on-cash multiples under varying conditions, including different purchase/exit multiples, EBITDA margins, and an IPO exit scenario.

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Subhronil Bose
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1K views4 pages

109 09 LBO Model Assessment Center Case Answers PDF

This document provides a case study for building a leveraged buyout model to answer questions about cash-on-cash multiples and IRR under different exit scenarios. It includes assumptions about the company's financials, purchase price, capital structure, and exit multiples. The case study then asks six questions requiring the use of the model to calculate purchase prices, IRRs, and cash-on-cash multiples under varying conditions, including different purchase/exit multiples, EBITDA margins, and an IPO exit scenario.

Uploaded by

Subhronil Bose
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Assessment Center Case Study – LBO Modeling Test

In this case study exercise, you will build a simple leveraged buyout model for a company and
then answer questions about the cash-on-cash (CoC) multiple and IRR, under both a traditional
M&A exit and an IPO exit.
Please note that you need to provide not only the correct answers to these case study
questions, but also a model that is easy to understand and well-formatted.
Ideally, you will also create sensitivity tables that show the impact of different entry and exit
multiples on the cash-on-cash multiple and IRR.
The company in this exercise has the following financial profile:

• LTM Revenue: €200 million


• LTM EBITDA: €50 million
• Revenue Growth: 10% per year over the 3-year projection period
• EBITDA Margin: 25% per year over the 3-year projection period
• D&A: 5% of sales
• Tax Rate: 20%
• Inventory: 10% of sales
• Receivables: 5% of sales
• Payables: 5% of sales
• CapEx: 7% of sales
Please use the following assumptions for the purchase and exit:

• EBITDA Purchase Multiple: You will be solving for this in the case study questions; no
baseline value.
• EBITDA Exit Multiple: Assume 8x LTM EBITDA in the base case.
• Management Rollover / Equity: Assume nothing, i.e. the PE firm owns 100% of the
company after the transaction.
• Fees: Assume a 0.5% M&A advisory fee on the purchase price, a 1.5% financing fee on
the total debt raised, and a 0.5% sponsor fee on the purchase price.
Use the following assumptions for the capital structure in the deal:

• Term Loan A: 1.0x LTM EBITDA; amortized equally over 5 years; L + 350 interest
• Term Loan B: 1.0x LTM EBITDA; amortized equally over 5 years; L + 400 interest
• Term Loan C: 1.0x LTM EBITDA; amortized equally over 5 years; L + 450 interest
• Second Lien: 1.0x LTM EBITDA; bullet repayment in 7 years; 8.25% fixed interest
• PIK: 0.5x LTM EBITDA; no amortization; 14.00% fixed interest

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http://www.mergersandinquisitions.com
Assume that LIBOR is 2.25%, and that the company earns 1.50% interest on its cash balance.
Assume an initial cash balance of $20 million just before the leveraged buyout takes place.
Within the model, assume that excess cash is NOT used to repay debt, and instead simply
accumulates on the Balance Sheet.
Set up your model and sensitivity tables, and then use them to answer the following questions:
Case Study Questions
1. How much could a private equity firm pay for the company to achieve a 2.5x cash-on-
cash multiple over a 3-year period?
It could afford to pay €372 million for the company (Purchase Enterprise Value), which is a 7.4x
LTM EBITDA multiple. The full results are shown in the sensitivity table below:

2. What IRR does this purchase price imply?


The 3-year IRR at this price is 35.7%. The results across a range of purchase and exit multiples
are shown below:

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3. By how much would the EBITDA margin need to increase in each year to achieve a 3.0x
cash-on-cash multiple over 3 years, if you assume the same purchase price?
The EBITDA margin would need to increase from 25.0% to 27.8% in each of the 3 projected
years for the private equity firm to achieve a 3.0x cash-on-cash multiple, assuming the same
7.4x EBITDA purchase multiple and the same LTM financial figures (€200 million in revenue and
€50 million in EBITDA).

4. If the EBITDA exit multiple were 1.0x higher, how would that impact the purchase price
required to achieve a 2.5x cash-on-cash multiple over 3 years?
At a 9.0x exit multiple, the private equity firm could afford to pay 8.0x EBITDA (€398 million
purchase price) initially and still earn a 2.5x cash-on-cash multiple.
As shown in the sensitivity tables above, for each 0.5x increase in the exit multiple, the IRR
increases by 4-5%, and the cash-on-cash multiple increases by 0.2-0.3x.

5. What are the IRR and cash-on-cash multiple if the private equity firm pays 7.0x LTM
EBITDA for the company, and exits at 8.0x LTM EBITDA after 3 years?
The multiple is 2.9x, and the IRR is 42.9%:

6. What are the IRR and cash-on-cash multiples if the PE firm exits via an IPO in 3 years, but
only sells 60% of its stake initially? Assume that the senior debt stays in place in this
scenario, and that the purchase and exit multiples are the same as in question #5 above.
Also assume that the PE firm’s remaining stake is sold 1 year following the IPO, and that
the company’s share price increases by 30% in that period.

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http://www.mergersandinquisitions.com
In this scenario, assuming a 7.0x purchase multiple and 8.0x exit multiple and no refinancing of
the senior debt, the cash-on-cash multiple would be 3.8x and the IRR would be 47.6%.
The numbers increase mainly because approximately 40% of the remaining debt balance is no
longer repaid at the end of Year 3; that actually makes a bigger difference than the 30% share
price increase (cash-on-cash multiple impact of 0.5x vs. 0.4x for the 30% share price increase):

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http://www.mergersandinquisitions.com

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