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Return on the enterprise value you pay (so all cashflow to all financiers). Insightful to split the return in i) the operational improvement and growth and ii) the gearing component.
Post above is spot on.
Another way to think of unlevered IRR is "what would the IRR be if you were 100% equity financed?" Under this scenario, your enterprise value would be the same as your equity value. The additional return / IRR upside on your investment is coming from leverage, where the debt holders are more comfortable giving the equity holders some of their excess return in exchange for downside protection.
Is it necessary to show this in an LBO model test? How would you calculate these?
Calculate by taking cash flow before debt servicing and interest as a dividend every year.
Is it incorrect to just show the initial cash outflow in year 0 and total proceeds at exit if you would like to assume no interim dividends? Presumably the cash payment amount would just accrue to value received at exit and IRR would be lower because you're realizing the cash flows later
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