Sample Questions
Question 1
Easy
The primary role of leverage in a PE buyout is to:
Solution
C is correct.
Leverage in an LBO reduces the amount of equity the PE firm must invest, allowing the same fund to make more investments. It also amplifies equity returns: if the company's assets generate returns above the cost of debt, the excess accrues entirely to equity holders. Combined with the tax shield from interest deductions, leverage is a fundamental tool in buyout value creation.
Leverage in an LBO reduces the amount of equity the PE firm must invest, allowing the same fund to make more investments. It also amplifies equity returns: if the company's assets generate returns above the cost of debt, the excess accrues entirely to equity holders. Combined with the tax shield from interest deductions, leverage is a fundamental tool in buyout value creation.
Question 2
Medium
A growth equity investment is most clearly distinguished from a buyout investment by:
Solution
B is correct.
Growth equity investments typically involve minority (non-controlling) stakes in companies with strong revenue growth and proven business models. Little or no leverage is used because the company's value proposition is revenue growth, not financial engineering. Buyouts, by contrast, involve controlling stakes with substantial leverage, targeting more mature companies where operational improvements and financial optimization drive returns.
Growth equity investments typically involve minority (non-controlling) stakes in companies with strong revenue growth and proven business models. Little or no leverage is used because the company's value proposition is revenue growth, not financial engineering. Buyouts, by contrast, involve controlling stakes with substantial leverage, targeting more mature companies where operational improvements and financial optimization drive returns.
Question 3
Hard
Based on Exhibit 2, the share of total equity value creation in the Aurora Logistics buyout attributable to EBITDA growth (decomposed at the entry multiple) is closest to:
Solution
B is correct.
Equity value creation at the entry multiple decomposes into three drivers: EBITDA growth valued at the entry multiple, multiple expansion on exit EBITDA, and debt paydown.
| Driver | Amount | Why |
|---|---|---|
| EBITDA growth | $224M | ($112M − $80M) x 7.0 entry multiple |
| Multiple expansion | $56M | (7.5 − 7.0) x $112M exit EBITDA |
| Debt paydown | $140M | Cash sweep to lenders |
| Total equity value creation | $420M | Reconciles to $616M exit equity − $196M entry equity |
| **EBITDA growth share** | **53.3%** | $224M / $420M |
Equity value creation at the entry multiple decomposes into three drivers: EBITDA growth valued at the entry multiple, multiple expansion on exit EBITDA, and debt paydown.
| Driver | Amount | Why |
|---|---|---|
| EBITDA growth | $224M | ($112M − $80M) x 7.0 entry multiple |
| Multiple expansion | $56M | (7.5 − 7.0) x $112M exit EBITDA |
| Debt paydown | $140M | Cash sweep to lenders |
| Total equity value creation | $420M | Reconciles to $616M exit equity − $196M entry equity |
| **EBITDA growth share** | **53.3%** | $224M / $420M |
