Answers for Investment Bank Technical Q&A

1. What’s an LBO and why do firms need it? Deal examples?
 A leveraged buyout is the acquisition of another company using a significant amount of borrowed money to meet the acquisition cost. Often, assets from both the firms are used as loan collateral. LBOs are conducted for 3 key reasons; to take a public company private, to spin-off a portion of an existing business by selling it, and to transfer private property.
Hilton Hotels LBO (2007): Blackstone bought it for $26 billion, financed through $5.5 billion in cash and $20.5 billion in debt.
 
 
2. How can a firm with positive EBITDA go bankrupt?
Bankruptcy occurs when a firm can’t make its interest or debt payments. Since EBITDA is Earnings BEFORE Interest, if an interest payment exceeds a firm's EBITDA and they have insufficient cash on hand, they'd soon default on debt and need bankruptcy protection.
 

3. How are convertible bonds accounted for in calculating enterprise value?
If the convertible bonds are 'in the money' meaning the conversion price is below the current market price, then account for the bonds as additional dilution to the Equity Value. If the bonds are out of the money, then account for them as debt at their face value.

 

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