Series 79 practice questionhardLeveraged Buyouts
In an LBO, if the debt/EBITDA ratio at closing is 7.0x, and the business plan projects EBITDA growth of 10% annually, what is the most likely driver for achieving a private equity sponsor’s target IRR?
- ARapid EBITDA growth and debt paydown to increase equity value✓ Correct answer
- BDividend recapitalizations year one
- CA reduction in the purchase price post-closing
- DUse of seller financing at high interest rates
Explanation
Why A — Rapid EBITDA growth and debt paydown to increase equity value
High initial leverage magnifies the impact of EBITDA growth and debt paydown on equity returns, which are key to driving IRR. Dividend recaps and price reductions are less feasible or relevant in this scenario, and seller financing at high rates burdens returns.
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