Very excited to launch our latest video which covers one of the most common LBO-related questions for Investment Banking and Private Equity interviews. Let us know if you have any questions!
You take the (ending value - beginning value)/beginning value to get the return rate. Then you use the formula ((1 + return rate) ^ (1 / number of years)) - 1. In this case it would be: return rate = (100 - 50) / 50 = 1 annualized rate of return = ((1 + 1) ^ (1 / 5)) - 1 = 0.148 which is approximately 15% Hope that helps
We have both a DCF video and this LBO video. It’s intentionally tight in the explanation here. I wouldn’t go any deeper in an interview as a starting point, there’s very little upside in that.
Im confused with ine thing. The 100 dollars left after devtors is paid doesnt all go to the owner right? The firms or individuals that purchased equity and essentially fascilitated the $50 equity financing would recieve their share if the return, correct? So owner would recieve their share of profit. Or by owner are yiu reffering to all owners, i.e all those with equity in the business
Yup, from what I know, the person who provided the equity financing would receive the share (i.e. the owners who are shareholders, owning equity in the business).
For the first answer to this question in an interview…I wouldn’t go any deeper than this…you want to start at a high level and then let them pull you into the weeds. After that though, they can take this to any level of depth they choose. If you want to be sure to answer everything…your best bet is to learn how to build a full LBO model front to back
Great video and well explained thank you! What happens to the remaining $30 of debt when you sell? Will it just stay as debt in the firm when selling or must it be repaid prior?
Hey Tudor, think of the Debt as being like a mortgage on a house. When you sell your house, if you have a mortgage, you have to pay it off. In the same exact way....in an LBO, the lenders who originally lent to you will require you to repay your outstanding Debt. Does that make sense?
