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LBO Modeling Exam – Wall Street Prep, 2026/2027 Edition – Verified Questions and Correct Answers

HEAL100 Health Care — exam and revision material · Other

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Health Care exam material, 17 pages. Originally published on StudyMerit.

Pages
17
Academic year
2025/2026
Language
English

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WALL STREET PREP LBO MODELING EXAM 1 PRACTICE QUESTIONS AND CORRECT ANSWERS (VERIFIED ANSWERS) PLUS RATIONALES 2025 Q&A | INSTANT DOWNLOAD PDF 1. What is typically the largest source of financing in an LBO transaction? A) Mezzanine debt B) Equity contribution C) Bank debt D) Seller financing Bank debt (senior debt) is usually the largest component of an LBO capital structure because it is cheaper than other forms of financing. 2. Which of the following characteristics make a company a good LBO candidate? A) High CapEx requirements B) Strong, predictable cash flows C) High customer churn D) Low asset base Predictable cash flows allow for reliable debt service in an LBO.

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3. What is the primary driver of returns in an LBO model? A) Revenue growth B) Exit multiple expansion C) Dividend recapitalization D) Purchase price The majority of LBO returns typically come from multiple expansion and debt paydown, not just growth. 4. Which of the following is true about IRR in an LBO? A) It measures net profit margin B) It is independent of the holding period C) It represents the annualized return to equity investors D) It accounts only for operating income IRR reflects the time-weighted return to equity investors, including exit proceeds. 5. Why is a "debt schedule" important in an LBO model? A) To track equity returns B) To monitor debt repayment and interest expense C) To calculate EBITDA D) To value the company The debt schedule ensures that debt service (interest and principal) is properly modeled. 6. What happens to IRR if the exit occurs earlier, assuming the same MOIC? A) IRR decreases B) IRR stays the same C) IRR increases D) IRR is unaffected IRR increases with shorter holding periods when MOIC is constant.

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7. What is the typical holding period for a private equity LBO investment? A) 1-2 years B) 2-3 years C) 5-7 years D) 10-12 years Most LBOs target an exit within 5 – 7 years. 8. Which ratio is most important for lenders in an LBO deal? A) PE ratio B) Debt/EBITDA C) Net income margin D) ROE Lenders focus on Debt/EBITDA as a measure of leverage and repayment capacity. 9. What does "cash sweep" mean in an LBO context? A) Using cash for dividends B) Sweeping cash into treasury C) Using excess cash to pay down debt D) Transferring cash to equity holders Cash sweep automatically allocates excess cash to debt prepayment. 10. What is a typical feature of mezzanine debt? A) Fully secured B) Lowest interest rate C) Subordinated with equity-like features D) Paid off first in liquidation Mezzanine debt sits between senior debt and equity and often includes warrants or PIK interest.

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