Series 79 practice questionmediumLBO Analysis - Equity Contribution
In an LBO transaction, if the sponsor increases its equity contribution and holds all other factors constant, which of the following is the most likely result?
- AGreater financial risk and higher IRR
- BLower financial risk and lower IRR✓ Correct answer
- CLower financial risk and higher IRR
- DGreater financial risk and lower IRR
Explanation
Why B — Lower financial risk and lower IRR
More equity reduces financial risk (less leverage), but reduces IRR due to less leverage and a larger upfront cash outlay. The other answers confuse risk, return, and leverage.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 995+ Series 79 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Spot an error in this question or explanation? Tell us — we fix these fast.
Related Collection, Analysis & Evaluation of Data questions
- A company has equity value of $200 million, total debt of $50 million, and cash of $20 million. What is its enterprise…
- If the average premium paid in precedent transactions is 30% and a current deal is announced at a 50% premium, which of…
- In calculating free cash flow for a DCF, if net working capital increases by $5 million, how does this affect free cash…
- An analyst projects free cash flow of $100 million in one year. If the discount rate is 10%, what is the present value…
- Which challenge is most commonly encountered when using precedent transactions for valuation?
- A company has 10 million shares outstanding and a current share price of $50. What is its equity value?
- An LBO model projects a company will pay down $40 million of its $100 million initial debt over a 5-year holding…
- In an LBO model, the exit multiple most commonly refers to which of the following?