Deck 4: Leveraged Buyouts

Question 1

Which of the following correctly ranks the capital structure hierarchy?

A)High yield bonds, mezzanine debt, equity contribution, bank debt
B)Equity contribution, mezzanine debt, high yield bonds, bank debt
C)Equity contribution, high yield bonds, mezzanine debt, bank debt
D)Bank debt, mezzanine debt, high yield bonds, equity contribution

Answer 1

B

Question 2

All of the following are ways to improve operational efficiencies EXCEPT:

A)Lower corporate overhead
B)Streamline operations
C)Increase marketing efforts
D)Reduce head count

Answer 2

C

Question 3

A target was purchased for $1,500.0m with an equity contribution of $500.0m.By year 5 no debt has been repaid and enterprise value has grown by $500.0m.Assuming the sponsor sells the target for its enterprise value, what is the sponsor's cash return?

A)2x
B)3x
C)1x
D)5x

Answer 3

A

Question 4

What is another name for a limited partnership structured as a fixed-life investment vehicle?

A)General partnership
B)Blind pool
C)Passive investment
D)SPAC

Question 5

Calculate the internal rate of return for a $300.0m cash outflow at the end of year 0 and a $716.0m cash inflow at the end of year 5.

A)16%
B)20%
C)18.5%
D)19%

Question 6

An ABL facility is generally secured by a first priority lien on which of the following assets?

A)PP&E
B)Deferred tax asset
C)Inventory
D)Goodwill

Question 7

What can protect investors from having debt with an attractive yield refinanced before maturity?

A)Floating interest rate
B)Fixed interest rate
C)PIK
D)Call premium

Question 8

Which of the following scenarios is likely to generate the highest return?

A)An LBO financed with 50% debt
B)An LBO financed with 30% equity
C)An LBO financed with 80% debt
D)An LBO financed with 50% equity

Question 9

A feature in the high yield market that allows the issuer to pay interest in the form of additional notes is called a:

A)Bridge loan
B)First lien
C)PIK
D)Term B loan

Question 10

Investment banks typically compete to provide a financing in an LBO, the legally binding letters are called?

A)Commitment papers
B)Revolver
C)Financing papers
D)Both A and C

Question 11

What is the primary metric used by sponsors to gauge the attractiveness of a potential LBO as well as the performance of their existing investments?

A)DCF
B)IRR
C)Precedent transactions analysis
D)Comparable companies analysis

Question 12

What kind of loan is needed if the "take-out" securities deteriorate between the signing and the closing of an LBO?

A)Bridge loan
B)Second lien term loan
C)PIK
D)Mezzanine debt

Question 13

A target was purchased for $1,500.0m with an equity contribution of $500.0m, and by year 5 $500.0m of cash flow was used to repay debt.Assuming the sponsor sells the target for the enterprise value, what is the value of the sponsor's equity?

A)$1,500.0m
B)$1,000.0m
C)$500.0m
D)$2,000.0m

Question 14

What is the main source of financing in a leveraged buyout?

A)Debt
B)Equity
C)Assets
D)Cash

Question 15

What is a private equity firm considered in an LBO?

A)A financial sponsor
B)A strategic investor
C)A passive investor
D)A limited partner

Question 16

What can potentially be reduced or eliminated in the event that economic or operating performance declines?

A)Growth capex
B)Assets
C)Maintenance capex
D)PP&E

Question 17

If a target was purchased for $1,500.0m with an equity contribution of $500.0m, what is the enterprise value of the target if it used $500.0m of cash flow to repay debt?

A)$1,000.0m
B)$500.0m
C)$1,500.0m
D)$2,000.0m

Question 18

Which of the following characteristics would represent an attractive LBO candidate?

A)Irregular cash flow and substantial assets
B)High capex requirements and small asset base
C)Predictable cash flow and substantial assets
D)Substantial assets and insubstantial cash flow

Question 19

Which of the following LBO financing scenarios will lead to the highest interest expense?

A)80% equity
B)20% debt
C)60% debt
D)20% equity

Question 20

Which of the following forms of financing tends to be the least flexible?

A)Bank debt
B)Mezzanine debt
C)Equity contribution
D)High yield bonds

Question 21

When performing a returns analysis in an LBO, which method does not include the time value of money?

A)IRR
B)DCF
C)Cash return analysis
D)Perpetuity growth method

Question 22

What is the annual interest rate paid on a debt obligation's principal amount outstanding called?

A)Covenant
B)Coupon
C)Call premium
D)PIK

Question 23

If an LBO target does not repay any debt during the investment horizon, how can the sponsor still realize a return?

A)If the target reinvests its cash into the business, the sponsor can realize a return by selling the target at a higher enterprise value
B)The sponsor cannot realize a return, as the enterprise value did not increase
C)The sponsor cannot realize a return, as the value of the sponsor's equity could not increase
D)It depends on the sponsor's internal rate of return

Question 24

All of the following are primary classifications of covenants EXCEPT:

A)Affirmative
B)Negative
C)Maintenance
D)Financial

Question 25

What is the classification of a covenant that requires to buyer to maintain a minimum EBITDA?

A)Affirmative
B)Negative
C)Maintenance
D)Financial

Question 26

Which exit strategy provides the sponsor with the ability to retain 100% of its existing ownership position in the target?

A)Sale to a strategic buyer
B)IPO
C)Dividend recapitalization
D)Private sale

Question 27

What is the classification of a covenant requiring a borrower to maintain assets, collateral, or other securities?

A)Affirmative
B)Negative
C)Maintenance
D)Financial

Question 28

What is the classification of a covenant that limits the amount of debt the borrower can have outstanding?

A)Affirmative
B)Negative
C)Maintenance
D)Financial