Paper LBO Example: A Fully Worked Walkthrough (Math Checked)
Last updated Oct 2026.
A paper LBO is a leveraged buyout you solve with a pen, paper and mental math. Wall Street Prep describes the usual format: a short prompt about a hypothetical company, a pen and paper, and about 5–10 minutes to estimate IRR and MOIC, with no calculator; sometimes the whole thing is verbal. It can come from a fund or even a headhunter; Transacted reported that CPI has occasionally asked candidates for a quick paper LBO in the initial meeting. Off-cycle first rounds may also include one (M&I).
Below is a complete example. We did the arithmetic by hand and then checked every figure with a spreadsheet-style recomputation, so you can use it as an answer key.
The prompt
A sponsor buys a company with $100mm of LTM EBITDA at 10.0x. It funds the deal with 5.0x debt at an 8% interest rate and equity for the rest. EBITDA grows 10% a year. D&A and capex are each $10mm a year; no change in working capital; tax rate 25%. All free cash flow repays debt. The sponsor exits after 5 years at 10.0x EBITDA. Ignore fees and minimum cash. What are the MOIC and IRR?
Step 1: Sources and uses
- Purchase price (enterprise value) = 10.0 × $100mm = $1,000mm.
- Debt = 5.0 × $100mm = $500mm.
- Sponsor equity = $1,000mm − $500mm = $500mm.
Say it out loud as you go: "Thousand of uses, five hundred debt, five hundred equity." Interviewers care about the logic as much as the number.
Step 2: Project EBITDA
10% growth compounds: $110mm, $121mm, $133.1mm, $146.4mm, $161.1mm in year 5. A quick check: 1.15 ≈ 1.61, so year-5 EBITDA is about 1.6x today's.
Step 3: Free cash flow and debt paydown
Free cash flow here = net income + D&A − capex − change in working capital. Because D&A equals capex and working capital doesn't move, FCF equals net income. Net income = (EBITDA − D&A − interest) × (1 − 25%). Interest is 8% of the debt balance at the start of each year, which falls as you repay it.
| $mm | Yr 1 | Yr 2 | Yr 3 | Yr 4 | Yr 5 |
|---|---|---|---|---|---|
| EBITDA | 110.0 | 121.0 | 133.1 | 146.4 | 161.1 |
| − D&A | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 |
| − Interest (8% × opening debt) | 40.0 | 36.4 | 31.9 | 26.5 | 19.9 |
| = Pre-tax income | 60.0 | 74.6 | 91.2 | 110.0 | 131.2 |
| − Tax (25%) | 15.0 | 18.7 | 22.8 | 27.5 | 32.8 |
| = Net income = FCF | 45.0 | 56.0 | 68.4 | 82.5 | 98.4 |
| Closing debt | 455.0 | 399.1 | 330.7 | 248.2 | 149.8 |
Cumulative debt paydown is about $350mm, leaving roughly $150mm of debt at exit. (Figures are rounded to one decimal; the unrounded closing balance is $149.80mm.)
Step 4: Exit
- Exit enterprise value = 10.0 × $161.1mm ≈ $1,610mm.
- Less remaining debt ≈ $150mm.
- Exit equity value ≈ $1,461mm.
Step 5: MOIC and IRR
MOIC = $1,461mm ÷ $500mm ≈ 2.9x (2.92x unrounded).
For IRR, use memorized anchors rather than a fifth root. These are exact compound annual rates, rounded to one decimal:
| MOIC | 3 years | 4 years | 5 years |
|---|---|---|---|
| 1.5x | 14.5% | 10.7% | 8.4% |
| 2.0x | 26.0% | 18.9% | 14.9% |
| 2.5x | 35.7% | 25.7% | 20.1% |
| 3.0x | 44.2% | 31.6% | 24.6% |
| 3.5x | 51.8% | 36.8% | 28.5% |
| 4.0x | 58.7% | 41.4% | 32.0% |
2.9x over five years sits just under 3.0x (24.6%), so say "about 24%." The precise answer is 23.9% (1.2395 ≈ 2.92). Wall Street Prep also mentions the Rule of 72 (a 2x in five years is roughly 72 ÷ 5 ≈ 15%) as a fallback when you forget the table.
The 60-second shortcut
Under time pressure, many candidates hold interest flat at the opening level ($500mm × 8% = $40mm a year) instead of recalculating it each year. That gives cumulative FCF of about $316mm, exit debt of about $184mm, exit equity of about $1,427mm and a MOIC of about 2.85x, or roughly 23% IRR. It understates returns slightly (you pay less interest as debt falls), but it lands within a point of the full answer. Say that you are simplifying and which direction the error goes; that is usually worth more than extra precision.
Where the returns came from
Equity grew from $500mm to about $1,461mm, a gain of roughly $961mm. Break it down:
- EBITDA growth: ($161.1mm − $100mm) × 10.0x ≈ $611mm.
- Debt paydown: $500mm − $150mm ≈ $350mm.
- Multiple expansion: none (bought and sold at 10.0x), so $0.
The pieces add back to about $961mm. Interviewers love this follow-up because it shows you understand why the deal works, not just the number.
Sensitivity: what if the exit multiple changes?
| Exit multiple | Exit equity | MOIC | IRR |
|---|---|---|---|
| 9.0x | ~$1,300mm | 2.60x | 21.1% |
| 10.0x | ~$1,461mm | 2.92x | 23.9% |
| 11.0x | ~$1,622mm | 3.24x | 26.5% |
Each turn of exit multiple is worth about $161mm of equity here (one year-5 EBITDA). Knowing that lets you answer "what if we exit at 9x?" in seconds.
Common mistakes
- Forgetting interest is tax-deductible. Taxes are on EBT, after interest and D&A.
- Double-counting D&A. Subtract it for taxes, add it back for cash flow, then subtract capex.
- Applying the exit multiple to the wrong year. Use year-5 EBITDA for a five-year hold.
- Using enterprise value as the payout. The sponsor gets equity value: EV minus remaining net debt.
- Silence. Narrate as you go. If an input is missing, state a reasonable assumption out loud (for example, capex equals D&A) rather than freezing.
- Adding fees nobody gave you. Wall Street Prep notes fees and rollover are unlikely to appear unless the prompt says so.
Practice problem (answer below)
$50mm EBITDA, bought at 8.0x. Debt 4.0x at 10%. EBITDA grows 5% a year. D&A and capex $5mm each, no working capital change, 25% tax, 100% cash sweep, five-year hold, exit at 8.0x.
Show the answer
Price $400mm; debt $200mm; equity $200mm. Year-5 EBITDA ≈ $63.8mm. FCF runs about $20.6mm, $24.1mm, $28.0mm, $32.3mm and $37.0mm, leaving about $57.9mm of debt. Exit EV ≈ 8.0 × $63.8mm ≈ $510.5mm; exit equity ≈ $452.6mm. MOIC ≈ 2.26x; IRR ≈ 17.7%. Returns split: about $110.5mm from EBITDA growth and $142.1mm from debt paydown, no multiple change.
From paper LBO to modeling test
The paper LBO is a screen. If you pass, the next step is usually a timed Excel LBO or a take-home case (Wall Street Prep; M&I describes a timed LBO modeling test as part of on-cycle interviews). The same logic scales up: sources and uses, projections, a debt schedule, returns and sensitivities, plus an investment recommendation. For how this fits the wider process, see how PE headhunters work, what on-cycle recruiting is and off-cycle recruiting.
FAQ
How long should a paper LBO take?
Wall Street Prep describes about 5–10 minutes with pen and paper. Aim to finish well inside that so you have time to discuss the result.
Can I use a calculator on a paper LBO?
Usually not. Expect pen and paper or a verbal exercise, so practice mental math and memorize MOIC-to-IRR anchors.
What MOIC is a 20% IRR over five years?
About 2.5x (2.5x over five years is a 20.1% IRR). 2.0x is about 15% and 3.0x is about 25%.
Should I include transaction fees in a paper LBO?
Only if the prompt gives them. Otherwise ignore fees and say you are doing so.
What is the difference between a paper LBO and an LBO modeling test?
A paper LBO is a few minutes of mental math to test your grasp of returns. A modeling test is a timed Excel build (or take-home case) with a full debt schedule, returns and sensitivities.