PE Interview Question
You have sales of $100, Gross Profit of $50, SG&A of $40 and EBITDA of $10. SG&A is 25% variable costs. If sales increase by 10%, what happens to EBITDA? What if sales decrease by 10%?
Trending Content - Private Equity Forum
Career Resources
This is not a PE interview question, this is IB SA
I'll take a stab at this (I could be wrong).
--
When Sales are $100:
Sales = $100 ; Gross Profit = $50
This means COGS = $50 and Gross Margins = 50%
Total SG&A = $40 and 25% is variable. This means Variable SG&A is $10 and Fixed SG&A is $30.
EBITDA here is $10 which is = Gross Profit - Total SG&A.
--
Note that when Sales increase, COGS generally increase too as COGS reflects the materials needed to make the products that are being sold and you need more COGS to sell more products. So we can assume that growth in COGS is proportional to growth in Sales at the same Gross Margins.
Regarding SG&A, the Fixed SG&A would remain constant irrespective of Sales while the Variable SG&A would change proportionally with Sales.
--
When Sales increase by 10%:
Sales = $110
Gross Margins = 50% therefore COGS = $55 (as you can see COGS also proportionally increases by 10% just like Sales)
Thus Gross Profit = $55
Total SG&A = Fixed SG&A + Variable SG&A
Fixed SG&A will stay the same at $30 while Variable SG&A will increase by 10% like Sales. So Variable SG&A = $11.
Thus Total SG&A = $41
EBITDA = Gross Profit - Total SG&A = $55 - $41 = $14
New EBITDA is $14 and EBITDA increases by 40%
--
When Sales decrease by 10%:
Sales = $90
Gross Margins = 50% therefore COGS = $45
Thus Gross Profit = $45
Total SG&A = Fixed SG&A + Variable SG&A = $30 + $9
Thus Total SG&A = $39
EBITDA = Gross Profit - Total SG&A = $45 - $39 = $6
New EBITDA is $6 and EBITDA decreases by 40%
--
Ah, a classic PE interview question! Let's break it down:
If sales increase by 10%, they become $110. Since SG&A is 25% variable, it will also increase by 10%, becoming $44. The Gross Profit will increase to $55 (since Gross Profit is Sales minus Cost of Goods Sold, and we're assuming COGS is a variable cost). So, the new EBITDA will be $55 - $44 = $11.
On the other hand, if sales decrease by 10%, they become $90. The variable portion of SG&A will also decrease by 10%, becoming $36. The Gross Profit will decrease to $45. So, the new EBITDA will be $45 - $36 = $9.
Remember, this is a simplified scenario and actual results could vary based on other factors not considered here. But this should give you a good starting point for understanding the relationship between sales, variable costs, and EBITDA. Keep those numbers cranking!
Sources: https://www.wallstreetoasis.com/forum/investment-banking/ebitda-net-working-capital-interview-question?customgpt=1, Got this task during an Private Equity internship interview, how to handle it?, Framework for Understanding Results, Thought Exercise / Interview Question about EBITDA
Can do as above but I think the purpose of this question was to test your knowledge of operating leverage, not mental math abilities.
So a better answer would be one using operating leverage. So clarify that cogs are 100% VC meaning that total VC are 60. OL = Contribution to Marin/ OP margin. So OL = ((100-60)/100/(10/100) = 40%/10% = 4x. And since OL is also = % change in EBITDA/%Change in rev, a 10% increase in rev will cause a 40% inc in EBITDA. And -10% rev =-40% EBITDA.
Sit vitae beatae unde iste aut quia. Temporibus iste consectetur consequatur et molestias esse. Maiores doloremque aliquid et nisi ratione laborum. Et ea sit deleniti. Nam et corrupti ullam minus sint illum distinctio.
Nemo beatae vel et recusandae. Laborum odio ea sit aperiam. Quia perferendis impedit illum odio ipsa enim ipsam.
Ab possimus error distinctio exercitationem. Culpa accusamus sed harum. Aliquid sint quidem porro cum labore nesciunt.
Cum harum vel velit iure quae. Omnis voluptas ut voluptatem sed praesentium et ut non. Enim eos fugiat commodi non ut. Eos ut excepturi ad ipsam et. Aut fugiat officia sapiente odio dolorem vitae. Blanditiis vel sint quia eligendi omnis fuga debitis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...