LBO PE Model Test
I have a traditional 3-statement LBO model test with a few question on returns at the end. I had two questions about approach:
- I was told I will be given a target IRR and have to solve back-wards to a purchase price. Would the best approach be to create a plug for equity value, solve through the test and then goal-seek for an exact IRR? Or might it be easier to get down to FCF and then XNPV by my target rate?
- There is a debt refinancing at close – There is an existing note that will be taken out at close. Would my S&U table be updated so that the new debt raised would be under Sources and Uses would be “taking out old debt”
The modeling I do day-to-day is much different than traditional LBO since I’m in a niche industry so I appreciate the help!
1. Yes on the first thing you said. I would just plug in a dummy multiple to get to initial equity value / purchase price and then build out the whole model. Once you have it built out, have a section for your implied entry valuation. Have a cell that has your desired IRR, i.e. "20%" and then backsolve to find the implied entry multiple to get to that IRR. For Year 5 for example, you would take your exit equity value that you originally got to for year 5, divide it by (1+20%) or (1+ your desired IRR), and then raise it to the exponent of 5 since you are in year 5 discounting. For Year 2, it would be to the exponent of 2, etc... Then for your net debt, it would be your total debt from your sources + Min cash to B/S + Transaction Fees + Financing Fees. That should get you to your implied entry enterprise value and thus implied entry multiple for a 20% IRR.
2. Correct - you would just have a line under your total uses that says something like "Refinancing of Debt"
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