If you were shrunk to the size of a pencil and put in a blender, how would you get out?
This is a brain teaser as well as a chance for employers to see if you have a sense of humor and creativity. It’s less important to get the right answer and more important to explain your logic. First, you should stay calm and observe your surroundings. Take note of the blender’s interior. Are there […]
How many eggs does a college cafeteria sell in the morning?
Market sizing questions are usually asked in consulting interviews but may be asked in IB or PE interviews since industry analysis is part of the job. It’s more important to explain the logic behind your assumptions and less important to get the right number. For example, let’s assume the college has 4,000 undergraduate students. We […]
How many black cars are there in New York City? What is the size of the black car market in New York City?
Market sizing questions are usually asked in consulting interviews but may be asked in IB or PE interviews since industry analysis is part of the job. It’s more important to explain the logic behind your assumptions and less important to get the right number. We can make an estimate of what % of total cars […]
What’s the purpose of creating a 3-statement model for an LBO?
Creating a 3-statement model enhances the accuracy of the model. If the balance sheet balances, that is very useful proof that the model is working. Furthermore, lenders and investors may wish to see the value of the assets and liabilities, as well as changes in the balance sheet over time. Lenders will often use the […]
If you buy a company at 10x EV / EBITDA with 5x debt / EBITDA and sell it at 10x EV / EBITDA 5 years later, what is the IRR if the EBITDA has doubled? Assume no debt has been paid down.
If we hypothetically say that LTM EBITDA is $1M, then we buy the company at an enterprise value 10 x $1M = $10M. We borrow 5 x $1M = $5M, so we have to put in $10M – $5M = $5M of equity. After 5 years, if EBITDA doubled, then ending EBITDA is $2M. If […]
What are some error checks you could do to make sure your LBO model is correct?
You can make sure your balance sheet balances: total assets = total liabilities + shareholder’s equity. You can also try to build a bridge from EBITDA. You can also look at the cash flow statement as well to make sure debt repayments / borrowings are linked properly to the debt schedule. If you are doing […]
What is the simplest LBO model you could make?
A simplified LBO model would not include a balance sheet or a full cash flow statement, although we still need the income statement and several key items from the cash flow statement. We would calculate levered free cash flow (LFCF) using the following formula: LFCF = Net Income + D&A – capex – increase in […]
Why do PE firms use an LBO model instead of a DCF model?
PE firms need to forecast their cash flows available for financing, which shows how much debt they need to borrow or repay. This way, they can build a debt schedule and figure out how much debt they can pay back, which allows them to find their ending equity after selling their company. By comparing their […]
When do private equity firms hire investment banks?
PE firms usually use investment banks when they sell one of their portfolio companies. This is because selling a company requires an extensive network of buyers which investment banks have access to. Additionally, there are also a lot of processes that investment banks have automated, and they are able to do the behind-the-scenes work more […]
What are the key factors you have to consider when deciding your exit strategy?
We need to consider the type of exit strategy, the type of buyers, and the sector outlook. Type of exit strategy: we could do an IPO, sell to a strategic acquiror, or sell to a private equity company Type of buyers: Will the buyers be strategic, financial sponsors, or both? Which sectors are they in? […]
