Interview Question

Investment Banking Analyst Interview

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Guggenheim Partners

in a LBO, if a PE borrows $10 million to buy out the company and sold the company with the same multiple that it originally purchased for. Assuming that the pe did not pay down any debt during the 5 years, wha'ts the IRR?

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3 Answers

7

I think the internal rate of return with be negative the interest rate at which the firm borrowed the $10 million. Anyone else?

IRR on

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I believe this question is flawed. A company's value can grow despite its multiple (P to E) staying at the same level.

Vince on

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Read last sentence... :Theoretically, a stock's P/E tells us how much investors are willing to pay per dollar of earnings. For this reason it's also called the "multiple" of a stock. In other words, a P/E ratio of 20 suggests that investors in the stock are willing to pay $20 for every $1 of earnings that the company generates. However, this is a far too simplistic way of viewing the P/E because it fails to take into account the company's growth prospects.

Vince.. again on

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