Questions-LBO-answers.pdf

Q1. What are the typical measures of performance used to evaluate LBO transactions: I. NPV II. IRR III. WACC IV. Money multiple V. Cash return A. I and II B. I, II, and IV C. I, II, III, and IV D. II, III, and IV E. II, IV, and V Q2. A financial sponsor has provided $100m of equity in an LBO transac...

Q1. What are the typical measures of performance used to evaluate LBO transactions: I. NPV II. IRR III. WACC IV. Money multiple V. Cash return A. I and II B. I, II, and IV C. I, II, III, and IV D. II, III, and IV E. II, IV, and V Q2. A financial sponsor has provided $100m of equity in an LBO transaction. The sponsor sells the target company after five years and receives $500m net of fees. What is the IRR of this transaction? A. 20% B. 38% C. 400% D. 500% E. Cannot be calculated Q3. Which statement is not correct? A. Financial sponsors have historically sought at least 20% annualized return for LBO transactions. B. A good candidate for an LBO is a company with stable and predictable cash flows. C. A good candidate for an LBO is a company with assets. D. Money multiple does not factor in the time value of money. E. All statements are correct Q4. Financial sponsors use high levels of debt in LBO transactions because: A. debt is less risky than equity for the target company B. financial sponsors do not have enough money to finance the whole transaction C. leverage increases returns for the financial sponsors D. there is a legal requirement for the minimum debt financing E. None of the above