Series 79 practice questionmediumLBO Analysis - Debt Paydown
An LBO model projects a company will pay down $40 million of its $100 million initial debt over a 5-year holding period. Assuming no change in enterprise value, what impact does this have on the sponsor's IRR?
- ALowers IRR
- BNo impact on IRR
- CIncreases IRR✓ Correct answer
- DMakes the IRR negative
Explanation
Why C — Increases IRR
Paying down debt increases equity value at exit (less debt owed), which improves IRR for the equity sponsor. The other answers reflect misunderstanding of the LBO mechanics.
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