Investment Banking Interview Guide Access the Rest of the Interview Guide Investment Banking Interview Guide, Advanced LBO Model – Quiz Questions Answers in bold. Table of Contents: • • •
Types of Debt and Financing Methods Financial Statement Adjustments and Debt Schedules Calculating Returns
Types of Debt and Financing Methods 1. All of the following types of debt are typically “floating-rate” instruments used to finance an LBO EXCEPT: a. Subordinated Notes b. Term Loan A c. Term Loan B d. Revolver e. None of the above i. Explanation: The correct answer choice is A. All of the answer choices listed above with the exception of A are floating-rate debt instruments, meaning that its interest rate is not fixed (e.g. 8% each year until Explanation: The correct answer choice is B. Only answer choice B is a false statement. PIK loans do not require cash interest payment, but instead the interest accrues to the principal balance and is paid off in full as a ‘bullet payment’ at maturity. The only type of debt that offers a PIK option is Mezzanine; in general, PIK debt is riskier than both bank debt and high-yield debt and carries a higher interest rate. Answer choice D is true, as a PE sponsor might prefer to use PIK debt so as to preserve cash used for interest payments and use that payment for additional Mandatory and Optional Debt Repayment. 7. Which of the following statements are TRUE regarding “Excess Cash” in the Sources & Uses section of an LBO model? a. Excess cash will always show up in the Sources column b. It arises when the target company has excess cash that the PE sponsor uses towards funding the transaction c. It is a very common scenario to see Excess Cash in an LBO model d. It allows the PE firm to pay a lower price to acquire the company – for example, $20.00 per share rather than $25.00 per share 4 / 15
Investment Banking Interview Guide Access the Rest of the Interview Guide i. Explanation: The correct answer choices are A and B. Excess Cash represents the incremental cash balance above and beyond what is needed for normal operations. When a company has Excess Cash, the PE sponsor can use this cash toward funding the buyout of the company. And for that reason, it shows
