Question

141) Which of the following items DIRECTLY factor into the calculation of a private equity firm’s internal rate of return (IRR) in a leveraged buyout?

a) Net Income.

b) Dividends.

c) Cash flow available for new debt repayment.

d) Initial investor equity contribution from the PE firm.

e) Optional debt principal repayments.

f) Net interest expense.

g) Net sale proceeds upon exit.

h) Capital expenditures.

i) Mandatory debt principal repayments.

Answer 1

The items used in calculation of IRR of a Leveraged Buyout are Initial investor equity contribution from the PE firm, Dividends and Net sale proceeds upon exit.

All payments pertaining to debt are ignored because the bought out firm uses its own cash flows to finance debt payments and hence these acash flows do not factor in while calculating the IRR of LBO applicable to a private equity firm who acquired another firm.