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A. Net income
B. Operating expenses
C. Interest expenses
D. EBIT
A. Management case
B. Base case
C. Sponsor case
D. Downside case
3) In a pre-LBO model, what is the new line item “financing fees” under?
A. Long-term liabilities
B. Long-term assets
C. Short-term liabilities
D. Short-term assets
4) In a pre-LBO model, net income on the first line of the cash flow statement
is initially:
A. Inflated
B. Understated
C. Correct
D. Deflated
A. CIM
B. Balance sheet
C. Income statement
D. Management case
6) The ending cash balance on the cash flow statement is linked to the:
A. Retained earnings
B. Cash and cash equivalents
C. Income statement
D. Long-term assets
Details:
Offer price per share: $20.0
Fully diluted shares outstanding: 100
Total debt: $200.0
Cash: $100.0
A. $2,000
B. $1,900
C. $2,100
D. $1,700
I. Term loan
II. Repayment of term loan
III. Purchase of equity
IV. Cash on hand
A. I only
B. I and IV
C. I and II
D. All are sources of funds
9) Calculate the total goodwill for a pro forma balance sheet given the following
details.
Details:
Equity purchase price: $2,000
Book value: $1,700
Existing goodwill: $100
A. $100
B. $300
C. $200
D. $400
10) In an LBO, financing fees are a(n):
A. Deferred asset
B. Asset
C. Deferred expense
D. Current liability
11) What is needed in order to complete the pro forma income statement from
EBIT to net income?
A. Balance sheet
B. Debt schedule
C. CIM
D. LIBOR curve
12) In a post-LBO model, where are the debt repayment amounts linked to?
13) When building a debt schedule, what are interest rates typically based on for
floating-rate debt instruments?
14) Calculate the interest rate for a revolving credit facility in 2014 given the
following information.
Details:
Pricing spread: 350 bps.
A. 7.85%
B. 4.35%
C. 0.85%
D. 3.5%
15) Given the following information, calculate the cash available for debt
repayment when building a post-LBO model.
Details:
Cash flow from investing activities: $30.0
EBIT: $65
Cash flow from operating activities: $120.0
D&A: $35
A. $100.0
B. $30.0
C. $90.0
D. $150.0
16) Given the following information, calculate the cash available for optional
debt repayment.
Details:
Cash flow from investing activities: $50.0
Cash flow from operating activities: $125.0
Total mandatory debt repayment: $30.0
Cash from balance sheet: $20.0
A. $65.0
B. $165.0
C. $45
D. $20.0
18) Given the following information, what is the total amount that has been
drawn from the revolver?
Details:
Revolver: $100.0m
Term: 3 years
Annual commitment fee: 30 bps
Cash available for optional debt repayment:
Year 1: $40.0m
Year 2: $35.0m
Year 3: $32.0m
A. $100.0m
B. $30.0m
C. $107.0m
D. Revolver remains undrawn
19) Which of the following do/does not require a set amortization schedule?
20) Use the average interest expense approach to calculate the annual interest
expense given the following details.
Details:
Beginning TLB: $300.0
Ending TLB: $250.0
Interest rate: 4%
A. $11.0m
B. $12.0m
C. $10.0m
D. $9.0m
Details:
Total interest expense: $25.0m
Interest income: $2.0m
Non-cash deferred financing fees: $3.0m
A. $23.0m
B. $20.0m
C. $26.0m
D. $30.0m
22) Given the following information, calculate the cash that will flow to the
balance sheet, assuming a 100% cash flow sweep.
Details:
Free Cash Flow: $65.0m
TLB amortization: $5.0m
Optional debt repayment: $70.0m
A. $60.0m
B. $70.0m
C. $65.0m
D. $0.0
23) What is a key credit risk management concern for underwriters in an LBO?
25) Which of the following provides an overview of the LBO analysis in a user-
friendly format?
A. CIM
B. Transaction summary
C. Sensitivity analysis
D. Debt schedule
26) When building a pre-LBO model, a banker builds the cash flow statement
through what point?
A. Operating activities
B. Financing activities
C. Investing activities
D. The cash flow statement is not built in the pre-LBO model
27) What is needed to build the pro forma balance sheet once the pre-LBO
model is finished?
A. CIM
B. Proxy statement
C. Sources and uses of funds
D. 10-K
28) Which part of the pro forma balance sheet is affected by the debt schedule?
A. Long-term liabilities
B. PP&E
C. Short-term assets
D. Goodwill
CHAPTER 5 ANSWERS
2) D. The bank’s internal credit committee(s) also require(s) the deal team to
analyze the target’s performance under one or more stress cases in order to
gain comfort with the target’s ability to service and repay debt during periods
of duress. These “Downside Cases” typically present the target’s financial
performance with haircuts to top-line growth, margins, and potentially capex
and working capital efficiency.
4) A. Net income is the first line item in the cash flow statement. It is initially
inflated in the pre-LBO model, as it excludes the pro forma interest expense
and amortization of deferred financing fees associated with the LBO
financing structure that have not yet been entered into the model. The
amortization of deferred financing fees is a non-cash expense that is added
back to net income in the post-LBO cash flow statement.
6) B. Once the cash flow statement is built, the ending cash balance for each
year in the projection period is linked to the cash and cash equivalents line
item in the balance sheet, thereby fully linking the financial statements of the
pre-LBO model.
8) B. Sources of funds refer to the total capital used to finance an acquisition. Uses
of funds refer to those items funded by the capital sources. A term loan and
cash are both sources of funds.
9) D. Goodwill is created from the excess amount paid for a target over its
existing book value. In this case the excess paid is $300 (equity purchase price
$2,000 minus book value $1,700). Adding $300 to the existing goodwill gives
us total goodwill of $400.
11) B. The debt schedule is an integral component of the LBO model, serving to
layer in the pro forma effects of the LBO financing structure on the target’s
financial statements. Specifically, the debt schedule enables the banker to:
• Complete the pro forma income statement from EBIT to net
income
• Complete the pro forma long-term liabilities and shareholders’
equity sections of the balance sheet
• Complete the pro forma financing activities section of the cash flow
statement
12) B. The debt schedule applies free cash flow to make mandatory and optional
debt repayments, thereby calculating the annual beginning and ending
balances for each debt tranche. The debt repayment amounts are linked to
the financing activities section of the cash flow statement.
13) D. For floating-rate debt instruments, such as revolving credit facilities and
term loans, interest rates are typically based on LIBOR plus a fixed spread.
14) A. To calculate the interest rate, the pricing spread of the revolving credit
facility is added to that year’s LIBOR on the Forward LIBOR Curve (350 bps
plus 4.35%).
15) C. The annual projected cash available for debt repayment is the sum of the
cash flows provided by operating and investing activities on the cash flow
statement (cash flow from operating activities $120 minus cash flow from
investing activities $30).
16) A. The annual projected cash available for debt repayment is the sum of the
cash flows provided by operating and investing activities on the cash flow
statement ($125.0 minus $50.0). This amount is first used to make mandatory
debt repayments on the term loan tranches ($75.0 minus $30.0). The
remaining cash flow is used to make optional debt repayments. In addition to
internally generated free cash flow, existing cash from the balance sheet may
be used (“swept”) to make incremental debt repayments ($45.0 plus $20.0).
17) B. The revolver’s drawdown/(repayment) line item feeds from the cash
available for optional debt repayment line item at the top of the debt
schedule. In the event the cash available for optional debt repayment amount
is negative in any year (e.g., in a downside case), a revolver draw (or use of
cash on the balance sheet, if applicable) is required.
18) D. Cash available for optional debt repayment has remained positive;
therefore, the revolver remains undrawn at the end of the term.
19) A. A revolving credit facility does not require a set amortization schedule.
21) C. First calculate total interest expense, which is the sum of cash and non-
cash interest expense, most notably the amortization of deferred financing
fees ($25.0m plus $3.0m). The amortization of deferred financing fees, while
technically not interest expense, is included in total interest expense as it is a
financial charge. Net interest expense is calculated by subtracting interest
income received on cash held on a company’s balance sheet from its total
interest expense ($28.0m minus $2.0m).
22) D. Because we are assuming a 100% cash flow sweep, all cash available for
optional debt repayment will go toward paying optional debt.
25) B. Once the LBO model is fully functional, all the essential model outputs are
linked to a transaction summary page; this page provides an overview of the
LBO analysis in a user-friendly format, typically displaying the sources and
uses of funds, acquisition multiples, summary returns analysis, and summary
financial data, as well as projected capitalization and credit statistics.
26) C. When building a pre-LBO model, a banker builds the cash flow statement
through investing activities, as the LBO financing structure is not yet entered
into the model.
27) C. Once the pre-LBO model is finished, the banker builds a sources and uses
of funds table that summarizes the flow of funds required to consummate the
transaction. The sources and uses of funds are then linked to the adjustments
column to create the pro forma balance sheet.
28) A. The debt schedule links to the pro forma long-term liabilities and
shareholders’ equity sections of the balance sheet.