In this article
The running example
Every answer below uses one made-up deal, set out in the table. The figures are illustrative, not from a source or a real transaction; they are chosen so the arithmetic stays clean, and every result was computed in code.1 All amounts are in millions of one currency. For the wider round a paper LBO sits in, read Private equity interview questions: the complete guide, and for the motivation question that usually comes next, see why private equity (PE) and not hedge funds.
| Input or result | Illustrative value |
|---|---|
| Entry earnings before interest, taxes, depreciation and amortization (EBITDA) | 100 |
| Entry multiple | 10 times |
| Entry enterprise value | 1,000 |
| Debt at entry (6 times EBITDA) | 600 |
| Sponsor equity at entry | 400 |
| Hold period | 5 years |
| Exit EBITDA | 150 |
| Exit multiple | 9 times |
| Exit enterprise value | 1,350 |
| Cumulative debt paydown | 250 |
| Net debt at exit | 350 |
| Exit equity | 1,000 |
Setup questions
What is a paper LBO and what does it test?
A paper LBO is a leveraged-buyout return estimate done by hand, with simple inputs and no spreadsheet. A leveraged buyout is, in the words of Corporate Finance Institute, one in which "a company is acquired using debt as the primary source of consideration". Wall Street Prep calls it "a common exercise completed during a private equity interview" (Wall Street Prep, July 2026). A strong answer states its assumptions, keeps the arithmetic visible and ends with a yearly rate of return.
Why it is asked: it shows whether you can structure a deal and do the sums calmly. Read the full explanation: Private equity interview questions: the complete guide.
Which inputs does a paper LBO give you, and what do you assume?
Typical inputs are entry EBITDA, an entry multiple, a debt multiple, growth, a hold period and an exit multiple; the test you face states its own list. EBITDA is earnings before interest, taxes, depreciation and amortization, a rough measure of operating profit. In the example, 100 of EBITDA at 10 times gives an enterprise value (EV), the price of the whole business, of 1,000, and debt of 6 times is 600.1 Say aloud anything you assume.
Why it is asked: it checks that you separate what is given from what you choose.
How do sources and uses work?
Sources are where the money comes from, uses are where it goes, and the two totals must match. In the example the use is the 1,000 purchase EV, funded by 600 of debt and 400 of equity from the sponsor, the private equity firm. Equity is the balancing figure: uses minus debt. Fees are a use too, so a 2% fee of 20 raises uses to 1,020 and the equity check to 420.1
Why it is asked: every later return depends on the equity figure you get here.
Knowing it is half the job. Saying it is the other half.
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How do you calculate MOIC?
The multiple on invested capital (MOIC) is exit equity divided by the equity invested. Net debt is debt minus cash, and exit equity is exit EV minus net debt. In the example, 1,350 of exit EV less 350 of net debt is 1,000, and 1,000 over the 400 invested is 2.5 times.1 Subtract net debt before you divide, never after.
Why it is asked: it is the first number every other return figure is built from.
How do you get IRR from MOIC without a calculator?
The internal rate of return (IRR) is the yearly rate that turns the equity invested into the equity received. With one cash flow in and one out, , where n is the number of years. For 2.5 times over 5 years that is 20.1%.1 Without a calculator, recall the anchors in the next answer and adjust from them.
Why it is asked: it tests whether you can turn a multiple into a rate on the spot.
What are the 2x, 2.5x and 3x shortcuts?
Over a five-year hold, 2 times is about 15% a year, 2.5 times about 20% and 3 times about 25%. The exact values are slightly lower or higher, as the table shows.1 A rule-of-72 check agrees (the rule divides 72 by the annual rate): money doubling at 15% a year takes about 72 / 15 = 4.8 years, close to five.
| MOIC | Exact IRR, 5 years | Shortcut |
|---|---|---|
| 2.0 times | 14.9% | about 15% |
| 2.5 times | 20.1% | about 20% |
| 3.0 times | 24.6% | about 25% |
Why it is asked: speed with a sensible error is the point of a paper test.
Why does the same MOIC give a different IRR over a different hold?
IRR depends on time, so one multiple of money is a faster rate when earned sooner. The same 2.5 times multiple is 35.7% a year over 3 years, 25.7% over 4 years and 20.1% over 5 years. The same 2.5 times multiple is 14.0% a year over 7 years.1 A quick exit lifts IRR; a long hold needs continued growth to keep up.
Text description of the diagram
- The same 2.5 times multiple is 35.7% a year over 3 years.
- The same 2.5 times multiple is 14.0% a year over 7 years.
Why it is asked: it separates candidates who know IRR is a rate over time from those who treat it as a multiple.
Value-creation questions
Where does the return in a paper LBO come from?
Equity value rises from 400 to 1,000, a gain of 600, and it splits into three levers. EBITDA growth adds 500 (50 more EBITDA at the entry multiple of 10). The exit multiple falling one turn, from 10 to 9 on 150 of EBITDA, takes away 150. Debt paydown adds 250. Then 500 − 150 + 250 = 600.1
Why it is asked: interviewers want you to name what drives the deal, not only the final rate.
Is debt paydown profit?
Debt paydown is not profit; it moves value from the lenders' claim to the owners' claim. Cash that repays 250 of debt lowers net debt by 250, so exit equity is 250 higher for the same exit EV. With no paydown, the example's exit equity would be 750, a MOIC of 1.875 times and an IRR of 13.4%, against 2.5 times and 20.1%.1
Why it is asked: confusing paydown with earnings is a common conceptual slip.
What happens if the exit multiple is lower than the entry multiple?
A lower exit multiple cuts the return directly. At 9 times, the example's exit EV is 1,350 and its IRR is 20.1%. At 8 times, EV is 1,200, exit equity 850, MOIC 2.125 times and IRR 16.3%. At 10 times, EV is 1,500, exit equity 1,150, MOIC 2.875 times and IRR 23.5%.1 A conservative answer sets exit equal to entry or lower; state which you choose.
Why it is asked: it shows whether you test the assumption that is hardest to forecast.
Sensitivity questions
How does more or less debt change the return?
More debt means less equity for the same price, so the same gain is spread over a smaller check. With 5 times debt (500) instead of 6, equity is 500; with the same growth and the same paydown, exit equity is 1,100, MOIC 2.2 times and IRR 17.1%, against 20.1% at 6 times.1 The cost of higher debt is risk: more interest and less room if EBITDA falls.
Why it is asked: it tests whether you link returns to financial risk.
How do fees change the answer?
Fees are part of uses, so they raise the equity needed without raising the business's value. Adding a 2% fee of 20 lifts equity from 400 to 420 and the use total to 1,020. Exit equity stays 1,000, so MOIC falls to 2.38 times and IRR to 18.9%, about 1.2 points below the 20.1% without fees.1
Why it is asked: leaving fees out is a small error that signals carelessness.
What exit multiple do you need for a 2x return?
Work backwards from the target. A 2 times return on 400 needs 800 of exit equity. Adding the 350 of net debt gives an exit EV of 1,150, and dividing by 150 of exit EBITDA gives an exit multiple of 7.67 times. That 2 times return is an IRR of 14.9% over five years.1
Why it is asked: reversing the calculation shows you understand how the pieces connect.
Should you include interest and taxes?
If the test gives the paydown directly, say aloud that you are ignoring interest and taxes and carry on. As a sanity check, an illustrative 10% rate on 600 of debt is 60 of interest in the first year, so the 100 of EBITDA covers interest only 1.7 times, before tax and spending on equipment.1 That is why paydown is not free.
Why it is asked: it checks that you know what a simplification leaves out.
Delivery questions
What mistakes ruin a paper LBO answer?
The costly mistake is dividing exit EV by the equity invested and skipping net debt: 1,350 over 400 gives 3.375 times instead of 2.5 times.1 Other slips are leaving fees out of uses, using the wrong number of years and treating debt paydown as extra profit. Check the final rate against the shortcut table before you say it.
Why it is asked: a clean method matters more than a perfect decimal.
How should you talk through a paper LBO out loud?
Say the steps in order: assumptions, sources and uses, exit value, net debt, MOIC, then IRR from the shortcut. A sayable close, with illustrative figures, is: "Equity in is 400, equity out is 1,000, so 2.5 times; over five years that is about 20%, mostly from EBITDA growth." Then name the main risk, such as a lower exit multiple. For the round around this exercise, see the private equity interview questions guide.
Why it is asked: the exercise is as much about structured speaking as arithmetic.
Follow-up questions
Do I need a calculator for a paper LBO?
The test states what is allowed. Practise without one, using round numbers and the shortcut table, and say your rounding aloud so the interviewer can follow it.
What if the interviewer changes an input halfway through?
Restate the changed input, redo only the steps it touches, and compare the new answer with the old one. Changing the exit multiple, for example, alters exit EV and MOIC but not sources and uses.
Is a paper LBO the same as a full LBO model?
No. A paper LBO is mental arithmetic with simplifying assumptions, while a full model projects statements year by year with interest and taxes. Learn the paper version as a check on the full one; the private equity interview guide shows where each fits. For the full-model version, see LBO interview questions; for the valuation side, walk me through a discounted cash flow (DCF) and valuation multiples and when each fails.
How do you practise paper LBO questions?
Pick new inputs, solve in order (sources and uses, exit equity, MOIC, IRR), then check the result with the shortcut table. Speak the answer in about a minute, as you would in the room. The question that often follows is why private equity rather than a hedge fund.
- A paper LBO runs sources and uses, exit equity, MOIC and IRR on simple inputs.
- Exit equity is exit EV minus net debt; skipping net debt overstates MOIC.
- IRR is MOIC to the power of one over the years, minus one; 2x, 2.5x and 3x over five years are about 15%, 20% and 25%.
- The return comes from EBITDA growth, the multiple change and debt paydown.
- Test the exit multiple, the debt level and fees, and state every assumption aloud.
Sources
- Paper LBO Tutorial | Practice Training Guide — Wall Street Prep, 1 Jul 2026
- LBO - Leveraged Buyout - Using Debt to Boost Equity Returns — Corporate Finance Institute (secondary), 4 Mar 2020
- Rule of 72 - Formula, Calculate the Time for an Investment to Double — Corporate Finance Institute (secondary), 18 Apr 2019
