LBO returns & debt paydown / ORIGINAL SCENARIO

Exit equity and sponsor return

Entry EV 500 funded with debt 300 and sponsor equity 200. At exit after five years EV 600, debt 180, no excess cash. Find equity proceeds, MOIC and IRR.

Amounts $m. No interim distributions, fees, other claims or additional equity. IRR as decimal.

Try it before the answer →

Worked answer

proceeds: 600 − 180 = 420
moic: (600 − 180) ÷ 200 = 2.1
irr: ((600 − 180) ÷ 200) ^ (1 ÷ 5) − 1 = 0.159962

Exit equity is EV less remaining debt.

MOIC ignores timing; IRR annualizes the return.

Technical follow-ups

If MOIC stays fixed but holding period shortens, what happens to IRR?

Can an attractive IRR conceal a modest absolute cash profit? Compare timing, leverage and MOIC.

Follow-up answer guide

For a fixed MOIC greater than 1 and no interim cash flows, shorter duration increases annualized IRR. State assumptions; IRR and MOIC measure different dimensions.

A fresh retry

The sponsor invests 250 of equity. After 4 years, exit EV is 720, remaining debt is 160, and excess cash is zero. Calculate equity proceeds, MOIC and IRR.

Amounts $m. No interim distributions, fees, other claims or additional equity. IRR as decimal.

Inspect replacement inputs

ev: 720
debt: 160
entryEquity: 250
years: 4

Check the retry bridge

proceeds: 720 − 160 = 560
moic: (720 − 160) ÷ 250 = 2.24
irr: ((720 − 160) ÷ 250) ^ (1 ÷ 4) − 1 = 0.223382

Original fictional example. Not a report of a specific firm’s interview. Explanations need qualified human review.