PE Interview questions - most common or tricky?
Hey guys, I have come across the following interview questions. Any guidance on how to answer these?
1. You buy a business at 8.0x EBITDA and believe that you can sell in 5 years at 8.0x EBITDA. Your required return is 20% a year. Assume that you can get 4.0x EBITDA of debt and that half can be repaid after 5 years. How much do you need to grow EBITDA by in this time?
2. You buy a company at 10.0x EBITDA. Year 1 EBITDA of $100mm and $150 in year 5. What multiple should you exit to get at least 25% IRR?
3. Assuming you want to get an IRR of 25%, what purchase multiple should you assume when you are modeling? - How would you go about this?
Thanks much.
---Message from WSO Below---
Uh I think for number 2:
10x EBITDA with EBITDA at 100mm = purchase price of $1bn 25% return on 1bn investment is 250mm Exit price to earn 250mm is 1.25bn Exit multiple with EBITDA at 150mm = 8.3x
Feel free to correct me, more wise members
Seriously, you're not helping anyone when you answer questions. You don't even know what IRR is.
I'm ballparking all of these without a calculator:
1) Edit: I was off.
2) 25% IRR over 5 years represents roughly 3x on initial invested capital. If we buy at 10x 100mm EBITDA, we put in $1bn, so we need to sell the business for ~$3bn in year 5. If year 5 EBITDA is $150mm, we need to sell it for 20x EBITDA.
3) I don't think we have enough info to answer this? We would need at least an entry multiple and know something about EBITDA growth / debt paydown over the horizon.
You're right, sorry - glad more helpful people could chime in!
You know to get an IRR of 20% that's about 2.5x your initial investment over 5 yrs (1.2^5)...so you need to return ~$100m to equity...so you know there is $20m of debt, so you need to sell biz for $120m in year 5 to get out $100m. if that is 8x EBITDA, that means EBITDA has to be at $15m by year 5....so you need to grow EBITDA by 50% in this example...not sure if i messed that up?
This example says nothing about the amount of debt you are raising...assuming 100% equity, youc an use mrb87's #s above...otherwise, you just make an assumption on the amount of debt you raise for deal and amount of debt paid down over 5 years to figure out how to get the 25% irr
This totally depends on cash flow available to pay down debt and how much debt you raise in the first place...
Tenetur eligendi quidem sunt. Iste omnis consequatur sed aspernatur ab dolores laboriosam ut. Dolores aperiam provident quidem. Alias dolor eum sit architecto. Doloribus sit sit consequatur et. Distinctio excepturi expedita impedit necessitatibus. Inventore aspernatur maxime veniam voluptas consequuntur sunt similique.
Fugit voluptatem est ratione eum sapiente similique. Culpa architecto occaecati eveniet necessitatibus magnam deserunt. Suscipit sequi eveniet iusto dolores et laboriosam ipsam. Quaerat ad ea dolor. Nemo nemo hic laborum quibusdam repellendus. Unde aut fugit vero dicta ea. Laudantium unde et illum ducimus quaerat.
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...