## You have stacks of quarters, dimes, nickels and pennies (these represent $0.25, $0.10, $0.05 and $0.01, respectively, in the US monetary system for anyone international). There are an unlimited number of coins in each stack. You can take coins from a stack in any amount and in any order and place them in your hand. What is the greatest dollar value in coins you can have in your hands without being able to make change for a dollar?

$1.19. There are a few ways to think about this, but the easiest is to start with the largest coin – quarters – first and then work your way down. 4 quarters equals $1.00, so we clearly can’t do that – but 3 quarters are ok because that’s only $0.75. Next, we have dimes. Recall … Read more You have stacks of quarters, dimes, nickels and pennies (these represent $0.25, $0.10, $0.05 and $0.01, respectively, in the US monetary system for anyone international). There are an unlimited number of coins in each stack. You can take coins from a stack in any amount and in any order and place them in your hand. What is the greatest dollar value in coins you can have in your hands without being able to make change for a dollar?

## What is the angle formed by the hands of the clock when it is 1:45?

142.5 degrees. If we just think of the clock hour hand at 1 and the minute hand at the 45 position (near 9 o’clock), that is 120 degrees since they are 4 “numbers” apart, and each number on the clock represents 30 degrees (360/12). However, recall that the hour hand has already moved by the … Read more What is the angle formed by the hands of the clock when it is 1:45?

## Most of the time, increased leverage means an increased IRR. Explain how increasing the leverage could reduce the IRR.

This scenario is admittedly rare, but it could happen if the increase leverage increases interest payments or debt repayments to very high levels, preventing the company from using its cash flow for other purposes. Sometimes in LBO models, increasing the leverage increases the IRR up to a certain point – but then after that the … Read more Most of the time, increased leverage means an increased IRR. Explain how increasing the leverage could reduce the IRR.

## In an LBO model, is it possible for debt investors to get a higher return than the PE firm? What does it tell us about the company we’re modeling?

Yes, and it happens more commonly than you’d think. Remember, high-yield debt investors often get interest rates of 10-15% or more – which effectively guarantees an IRR in that range for them. So no matter what happens to the company or the market, that debt gets repaid and the debt investors get the interest payments. … Read more In an LBO model, is it possible for debt investors to get a higher return than the PE firm? What does it tell us about the company we’re modeling?

## How would you adjust the Income Statement in an LBO model?

The most common adjustments: • Cost Savings – Often you assume the PE firm cuts costs by laying off employees, which could affect COGS, Operating Expenses, or both. • New Depreciation Expense – This comes from any PP&E write-ups in the transaction. • New Amortization Expense – This includes both the amortization from writtenup intangibles … Read more How would you adjust the Income Statement in an LBO model?

## Explain how a Revolver is used in an LBO model.

You use a Revolver when the cash required for your Mandatory Debt Repayments exceeds the cash flow you have available to repay them. The formula is: Revolver Borrowing = MAX(0, Total Mandatory Debt Repayment – Cash Flow Available to Repay Debt). The Revolver starts off “undrawn,” meaning that you don’t actually borrow money and don’t … Read more Explain how a Revolver is used in an LBO model.

## Walk me through how you calculate optional repayments on debt in an LBO model.

First, note that you only look at optional repayments for Revolvers and Term Loans – high-yield debt doesn’t have a prepayment option, so effectively it’s always $0. First, you check how much cash flow you have available based on your Beginning Cash Balance, Minimum Cash Balance, Cash Flow Available for Debt Repayment from the Cash … Read more Walk me through how you calculate optional repayments on debt in an LBO model.

## Just like a normal M&A deal, you can structure an LBO either as a stock purchase or as an asset purchase. Can you also use Section 338(h)(10) election?

In most cases, no – because one of the requirements for Section 338(h)(10) is that the buyer must be a C corporation. Most private equity firms are organized as LLCs or Limited Partnerships, and when they acquire companies in an LBO, they create an LLC shell company that “acquires” the company on paper.

## What are some examples of incurrence covenants? Maintenance covenants?

Incurrence Covenants: • Company cannot take on more than $2 billion of total debt. • Proceeds from any asset sales must be earmarked to repay debt. • Company cannot make acquisitions of over $200 million in size. • Company cannot spend more than $100 million on CapEx each year. Maintenance Covenants: • Total Debt / … Read more What are some examples of incurrence covenants? Maintenance covenants?