Gonna be interviewing for a lateral FT analyst position. I need you guys to give me the type of questions I am going to be asked.
HR says an associate is going to ask me technicals on my LBO modeling experience. Hit me with some technicals (and answers.)
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Walk me through an LBO
The associate slides a paper your way. What are you about to do?
What is the cash flow we use in LBO? And why?
I'm thinking unlevered cash flow in the financial projection, if we are going to net out interest / principle payments afterward. Or, just levered CF if we are calculating IRR / MOM. Let me know what the answer is?
Definitely levered. You want to see what cash is left over to go to your equity holders (usually it will be 0 as you pay down principals). But if you do have leftover, you only care about what goes to the GP and LPs (levered cash flow)
Pretty basic, but would you rather have an extra $ of EBITDA or an extra $ of debt paydown?
What’s the correct answer?
$ of EBITDA since you get the multiplier effect. EV = Ebitda x multiple which is worth more than the $ of debt paydown.
Just do a bunch of paper LBO scenarios. Include some with dividend recaps and some without. Know how to calculate IRR quickly based off of a given holding period and MoM.
Can anyone walk through how to do this? I've never seen a paper LBO with a div recap
YouTube has a few good ones
January 1st, 2022.
What change impacts how a firm would value an LBO?
If you don't know the answer, my firm would ding you.
is it the tax cut thing?
Interest Expense limit of 30%
On the right track, but the answer is that the write-off is based on EBIT instead of EBITDA. .
Your firm would ding an analyst candidate who doesn't know an LBO tax law which isn't going into effect for another two years? Not saying it isn't important to know, but it's definitely odd
Already in effect and used in all FSG / LF/ high yield coverage models for tax calculations. would expect him to know it if it’s a lateral FT move.
Am I the only one who was thinking "holy shit these are tough questions" while reading the posts on this thread? Where do you guys learn this stuff? We did not talk about this in my finance classes lmao.
Practice.
TrainingTheStreet, BreakngIntoWallStreet, others are good starting points.
Practice, practice, practice. Over time it comes naturally.
How do you calculate share price from an LBO?
Similar version: how does an LBO actually provide a floor valuation (on a football field)?
I'm more of the view that LBO modelling tests are more of a check-the-box thing. I'd spend more time trying to refine my answers relating to those how-to-think-like-an-investor sort questions since those probably require more thought.
This^
What % of the total transaction size should be financed by debt normally? At this current time of the pandemic, do you think the % should be modified?
If you knew the exact ramifications of the pandemic right before it happened, would you have pursued any specific txns specifically? Why or why not?
I really like your second question - how do you think about it? The obvious answer is to invest in the companies that would benefit (Instacart Chewy etc.) but haven't spent enough time to peel back the next layer of the onion.
That question is really more to see how you think about things. I don't think there's necessarily a single right answer. The purpose is to see whether the person can understand the effect of this pandemic and what has changed, and potentially how things might change if this were to continue on for several more months.
would the % debt go down since there’s more uncertainty on whether the firm can be able to pay back the debt?
10x entry, 100% equity, 10% ebitda margin, 100% cash conversion, flat ebitda for 5 years, NTM 10x exit, year 6 revenue 50%. IRR?
What's your rev or ebitda at entry?
wasn't given (got this at an interview), but i think you can get an answer by assuming a ebitda at entry? and get revenue from ebitda margin
My thinking would be the following:
Assume EBITDA = $1 10x EBITDA at entry with all equity >> TEV = Total Equity = $10 100% cash conversion on $1 of EBITDA x 5 years (since EBITDA is flat) = $5 10% margin for the $1 EBITDA implies $10 Revenue Year 6 Revenue = $15 and assuming no margin adjustment EBITDA = $1.5 10x NTM exit on $1.5 EBITDA >> TEV = Total Equity = $15 $5 FCF + $15 TEV = $20 return MoM = $20 / $10 = 2.0x IRR = ~15%
When would an LBO give a higher valuation than other methodologies?
What's the answer to this? I always thought LBO would be the lowest.. Unless the WACC is outrageously high, which wouldnt really make sense
guessing you mean WACC is low.
Assuming when it’s a strategic LBO i.e. lbo being done to bolt on to current portfolio company. lots of back end + WC synergies. will boost what you will want to pay for business.
When your required IRR is low
got this at a summer analyst PE position: You are a hedge fund manager who hasn't been doing well recently. You have to go all in on a company and you're deciding between two lumber companies. There is a 10% increase in the values of wood, Company X has high operating leverage and Company Y has low operating leverage, both companies have same operating margin, which do you invest in and why? Now assume there is a 10% decrease in the value of wood and you have to short a company, which do you choose and why?
Can someone help me with this? High operating leverage means incremental revenue affects profit more BUT isn't that only for incremental volume (your Variable Costs and Fixed Costs are staying the same here because only price changes) so you would be indifferent either way if you have the same operating margin?
Hint - Assume no pass through contracts. So increase in cost of Lumber doesn’t hit revenue but COGS...... you should get it from here.
curious also
Got asked this for a SA interview: What industries/instances an LBO valuation would produce a higher valuation than a DCF? Didn't get told the answer and I still don't know lol
Dying industries that still throw off cash. Newspaper businesses are a good example. A situation where the terminal value in the DCF is likely to be impaired (negative growth rate, etc.)
Debt investment but similar line of thinking...
https://pitchbook.com/news/articles/apollo-doles-out-18b-loan-for-newsp…
Your new group does sponsor-backed txns or wha?
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