Sample report · Technical · paper LBO
A sponsor buys a company with $100 million of EBITDA at 10 times, funded 60% with debt. EBITDA grows to $150 million over five years, no debt is paid down, and it sells at 10 times. What are the multiple of money and the IRR?
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96 / 100
Exceptional
The rubric
Summary
An excellent paper LBO answer with accurate entry and exit calculations, the correct equity multiple, and an appropriate rule-of-thumb IRR estimate. You clearly explained that EBITDA growth generated the entire gain and independently reconciled it to the change in sponsor equity. You also handled the debt-paydown follow-up correctly, with a sensible interpretation of its impact on returns. The explanation was concise and easy to follow; the main refinement would be to lead with the multiple and IRR before walking through the calculations.
Content & Knowledge · 59/60
You correctly calculated $400 million of initial equity, $900 million of exit equity, a 2.25 times multiple, and an approximately 17–18% IRR using appropriate five-year anchors. You reconciled the $500 million gain to EBITDA growth and correctly calculated $1,050 million of exit equity and roughly 21% IRR with debt paydown; the rounded 2.6 times multiple was appropriate for a mental calculation.
Structure & Organization · 18/20
Your progression from entry capitalization to exit equity, multiple, and IRR was logical and easy to follow. The follow-up explanations were focused and included a useful reconciliation, although opening with the headline returns would have made the response even more efficient.
Communication & Clarity · 19/20
You used plain language, identified dollar amounts clearly, and distinguished an approximate IRR from an exact calculation. The delivery was concise and well suited to a live technical interview, with only a small opportunity to make it more answer-first.
What worked
“So the purchase price is 100 million of EBITDA times 10, so a billion dollars. Sixty percent debt means 600 million of debt and 400 million of equity from the sponsor, and I'll ignore fees.”
You correctly established the entry valuation and financing split, clearly distinguishing the sponsor's equity investment from the total purchase price. Stating the no-fees assumption also made the calculation transparent without adding unnecessary complexity.
“None of the debt was paid down, so I subtract the full 600 million and the sponsor's equity is 900 million. 900 over 400 is 2.25 times.”
You correctly bridged exit enterprise value to equity value and calculated the return on the sponsor's equity rather than on enterprise value. This directly addresses the central technical distinction in a paper LBO, and your arithmetic is accurate.
“For the IRR, 2 times over five years is roughly 15 percent and 2.5 times is roughly 20, so 2.25 is somewhere around 17 to 18 percent.”
You used appropriate five-year return anchors to estimate the compounded annual return. The resulting range correctly captures the approximately 17.6% IRR, and your approximate language avoids presenting interpolation as an exact calculation. This is an efficient method for a no-calculator interview.
“The multiple is flat at 10 times going in and coming out, and there's no paydown, so the 50 million of extra EBITDA at 10 times is the 500 million of value the sponsor gained. Which is also 900 minus 400, so it ties out.”
You accurately attributed the entire dollar gain to EBITDA growth, explicitly ruling out multiple expansion and debt paydown. Reconciling the $500 million value increase to the change in sponsor equity provided a useful independent check and demonstrated understanding beyond memorized formulas.
“Then debt at exit is 450 million instead of 600, so equity is 1,050 million. 1,050 over 400 is about 2.6 times, so the IRR goes up to around 21 percent.”
You handled the follow-up correctly by reducing exit debt while leaving the original equity investment unchanged. Your rounded multiple and IRR are consistent with the precise results of 2.625 times and approximately 21.3%, demonstrating that you can adapt the equity bridge when the financing assumptions change.
Your next steps
- 1. Keep exact multiples before rounding the IRR. Your entry-to-exit bridge and IRR anchors were accurate. Make the paydown follow-up even sharper by stating $1,050 million ÷ $400 million = 2.625x, then rounding to about 21% IRR. Practise dividing by four and adjusting the decimal so you can retain this precision without a calculator; keep describing interpolated IRRs as approximate.
- 2. Make the cash-flow interpretation conditional. Your $500 million EBITDA-growth bridge clearly explained the return. Strengthen the practical interpretation by asking whether cash accumulates at exit, or explicitly assuming no excess cash. No debt paydown alone does not establish that exit cash is zero. Likewise, say that paydown raises returns relative to this no-cash base case, rather than implying real deals necessarily repay debt: cash could instead be retained or reinvested.
The interview, out loud (7 turns)
Interviewer: Thanks for making time. I'm on the deal team here, and I'd like to start with a quick paper LBO, no calculator. A sponsor buys a company with 100 million of EBITDA at 10 times, funded 60% with debt. EBITDA grows to 150 million over five years, no debt is paid down, and it sells at 10 times. What are the multiple of money and the IRR?
Candidate: Sure. So the purchase price is 100 million of EBITDA times 10, so a billion dollars. Sixty percent debt means 600 million of debt and 400 million of equity from the sponsor, and I'll ignore fees. At exit EBITDA is 150 million at 10 times, so enterprise value is 1.5 billion. None of the debt was paid down, so I subtract the full 600 million and the sponsor's equity is 900 million. 900 over 400 is 2.25 times. For the IRR, 2 times over five years is roughly 15 percent and 2.5 times is roughly 20, so 2.25 is somewhere around 17 to 18 percent.
Interviewer: Good. Where did that return come from?
Candidate: It's really all EBITDA growth here. The multiple is flat at 10 times going in and coming out, and there's no paydown, so the 50 million of extra EBITDA at 10 times is the 500 million of value the sponsor gained. Which is also 900 minus 400, so it ties out.
Interviewer: And if the company's cash flow had paid down 150 million of debt over the five years?
Candidate: Then debt at exit is 450 million instead of 600, so equity is 1,050 million. 1,050 over 400 is about 2.6 times, so the IRR goes up to around 21 percent. Which tells you the base case is a bit conservative, since in a real deal some of that cash would go to paying down debt.
Interviewer: Okay, that's what I needed. Let's move on.
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