Series 79 practice questionhardFinancial Modeling
Why is circularity common in an LBO model?
- ARevenue depends on the market capitalization of peers
- BInterest expense depends on debt balances while debt paydown depends on cash flow after interest✓ Correct answer
- CPurchase accounting eliminates all taxes
- DWorking capital changes can be ignored in leveraged transactions
Explanation
Why B — Interest expense depends on debt balances while debt paydown depends on cash flow after interest
Interest expense depends on debt balances while debt paydown depends on cash flow after interest Debt and interest are interdependent, so models often require iterative calculations or carefully designed sweeps. Understanding circularity is essential when modeling variable-rate debt and mandatory amortization.
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