Paper LBO Practice Problems for Interviews (With Worked Answers)

Paper LBOs show up in PE interviews and in some IB superdays. You get a fact pattern, no Excel, and five to ten minutes. The skill is a repeatable sequence, not genius arithmetic. These drills are meant to be done on paper with a timer. Work them in order: learn the sequence untimed, then add speed, then add interviewer twists.

The sequence (use every time)

1. Entry enterprise value = entry EBITDA × entry multiple
2. Debt and equity split at close
3. Exit EBITDA (grow or step)
4. Exit enterprise value = exit EBITDA × exit multiple
5. Ending debt = entry debt − cumulative paydown (+ if cash negative / more draws)
6. Exit equity = exit EV − ending debt
7. MoIC = exit equity ÷ entry equity
8. Rough IRR from MoIC and hold period

Say assumptions as you go. Interviewers grade process as much as the final IRR. If you go silent for three minutes and then announce "about 20%," you still fail.

Optional steps when the prompt is richer

• Revenue → EBITDA margin bridge if they give sales growth and margins
• Interest and taxes if they want a more literal free cash flow
• Beginning cash / minimum cash / fees if mentioned
• Management rollover or options (usually ignored unless specified)

For most undergrad and first-round PE paper LBOs, the eight-step core is enough.

IRR anchors (terminal-only)

5-year hold

3-year hold (useful for quick checks)

These are approximations of MoIC^(1/n) − 1 with no interim cash flows. If the prompt includes dividends or a recap, say the shortcut is incomplete and sketch the cash timing.

Problem 1: Base case

Prompt: Buy a company with $100M EBITDA at 10.0x. Finance with 60% debt, 40% equity. EBITDA grows to $140M in Year 5. Exit at 10.0x. Debt paydown totals $150M over the hold. Ignore cash, fees, and taxes. What is MoIC and rough IRR?

Worked answer:

Entry EV = 100 × 10 = $1,000M
Debt = 600, Equity = 400
Exit EV = 140 × 10 = $1,400M
Ending debt = 600 − 150 = 450
Exit equity = 1,400 − 450 = 950
MoIC = 950 / 400 = 2.375x ≈ 2.4x
IRR ≈ high teens (between 2.0x~15% and 2.5x~20%)

Clean close: "About 2.4x and roughly 19% IRR over five years, assuming a flat multiple and $150M of deleveraging."

Returns attribution verbal: EBITDA growth created value at the entry multiple, deleveraging added equity by shrinking debt, multiple expansion contributed nothing.

Problem 2: Multiple compression

Same as Problem 1, but exit multiple is 8.0x.

Exit EV = 140 × 8 = $1,120M
Ending debt = 450
Exit equity = 1,120 − 450 = 670
MoIC = 670 / 400 = 1.675x ≈ 1.7x
IRR ≈ low double digits

What to say: Same operations, worse exit multiple, much weaker deal. This is why "we will exit at entry multiple" is an assumption, not a law.

Problem 3: Pure deleveraging

Prompt: Entry EBITDA $50M at 8.0x. Debt 50% of EV. Exit EBITDA $50M (no growth) at 8.0x after 5 years. FCF pays down $80M of debt. MoIC?

Entry EV = 400
Debt = 200, Equity = 200
Exit EV = 400
Ending debt = 200 − 80 = 120
Exit equity = 280
MoIC = 1.4x
IRR ≈ mid-single to high-single digits on a 5-year basis

What to say: Returns are almost entirely debt paydown. Operations and multiple contributed nothing. Sponsors can still like this if cash conversion is reliable and entry price is disciplined, but it is not a growth story.

Problem 4: Margin expansion case

Prompt: Entry revenue $500M, EBITDA margin 20% → EBITDA $100M. Buy at 9.0x. Debt 55% of EV. In Year 5, revenue is $650M and margin is 24%. Exit at 9.0x. Cumulative debt paydown $120M. MoIC?

Entry EBITDA = 100
Entry EV = 900
Debt = 495, Equity = 405
Exit EBITDA = 650 × 0.24 = 156
Exit EV = 156 × 9 = 1,404
Ending debt = 495 − 120 = 375
Exit equity = 1,404 − 375 = 1,029
MoIC = 1,029 / 405 ≈ 2.5x
IRR ≈ ~20%

What to say: Growth plus margin expansion drives EBITDA; flat multiple means no multiple arbitrage; deleveraging still helps.

Problem 5: Follow-up twists on Problem 1

Start from Problem 1, then adjust one lever at a time without restarting your whole page.

Interviewers love changing one assumption after your first answer. Patch the bridge. Do not erase everything and panic.

Problem 6: Quick "would you do the deal?" overlay

After any paper LBO, expect:

• What is the returns mix (delever / EBITDA / multiple)?
• What is the key risk to the case?
• What entry multiple still clears a 20% IRR?

For Problem 1, a rough sensitivity instinct: if exit stays 10x and paydown stays $150M, higher entry multiple shrinks MoIC fast because equity absorbs the price increase when debt capacity is fixed.

Timing targets

If you are lost at minute three, you skipped structure. Rewrite the eight steps at the top of the page before you compute.

Common errors

• Mixing equity value and enterprise value at exit
• Forgetting to subtract ending debt
• Using entry equity as exit equity
• Quoting IRR without MoIC (or MoIC without hold period)
• Applying the terminal IRR shortcut when interim dividends exist
• Growing revenue but forgetting margin changes when both are given
• Changing debt % and dollar debt inconsistently after an entry multiple shock

Multi-day practice plan

Day 1: Problems 1 to 3 untimed; write the eight steps from memory
Day 2: Problem 1 with five twists; say returns attribution each time
Day 3: Problems 4 to 5 timed (10 minutes each)
Day 4: Invent two prompts from a news buyout headline; make reasonable assumptions explicit
Day 5: Full mock: paper LBO + "would you do this deal?" + one technical accounting question after
Day 6: Build Problem 1 in a real LBO model and reconcile your paper answer
Day 7: Rest day on new prompts; redo Problem 2 and 3 at interview speed

How this connects to live modeling

Paper LBOs train the returns spine. Live LBO models add interest schedules, working capital, taxes, fees, and revolvers. If your paper answer and model answer diverge wildly on a simple case, your sequence has a bug. Use both.

Project Apollo-style graded LBOs are for the model side. This page is for the interview room when Excel is not allowed. You want both reflexes.