Can I use a calculator for a paper LBO?

Usually not. The numbers are chosen to be round. Some firms allow one for a longer modeling test, but practice without one.

How long should a paper LBO take?

About ten to fifteen minutes for a five year version with debt paydown. Simpler prompts with no paydown take two or three minutes.

What if the prompt does not give D&A or capex?

Ask. If they say to ignore them, free cash flow is EBITDA minus interest minus tax. State every assumption you make out loud.

What IRR should I aim for in the answer?

Whatever target the interviewer gives you. A common follow up is to name the target and ask what entry price, exit multiple, or growth would reach it. Work backward: target MOIC from the IRR anchors, then the exit equity that requires.

Is a paper LBO the same as a modeling test?

No. A modeling test builds a full LBO in Excel over an hour or more. The paper LBO is the same logic, simplified, done by hand in minutes.

The paper LBO in PE interviews, worked step by step

A paper LBO is a simplified buyout you solve with pen and paper in about ten to fifteen minutes: set the purchase price and debt, project a few years of free cash flow, use it to pay down debt, then compute exit equity, MOIC, and IRR. The worked example below buys at 10x EBITDA of 100 with half debt and returns about 2.5x and 20% over five years.

Updated November 6, 2026. Live data checked against each firm's own careers site 1m ago.

What is a paper LBO testing?

That you understand how a buyout makes money and can do the math without a spreadsheet. The interviewer gives you a short prompt with round numbers: the entry multiple, EBITDA and its growth, the debt and its rate, the tax rate, capex and depreciation, and the exit multiple. You return MOIC and IRR, and say where the return came from.

It shows up most in private equity interviews, and sometimes in banking superdays. The sample below is from our private equity modeling bank, which includes the setup questions that come before and after a paper LBO.

1.Walk me through an LBO from the sponsor's perspective.
2.EBITDA is 100 today and 140 in year five, exit at 9x. Entry debt is 500, falling to 300 at exit. What is the most you can pay for a 25% IRR?
3.A sponsor owns 80% of a company and management owns 20%. Exit equity is 1,000, and management also gets a 10% option pool on gains above the 400 entry equity value. What does the sponsor receive?
4.What is a reverse LBO question in a case, and how do you set it up?
5.Base price 500 with 200 of debt, so 300 of equity, plus a 50 earnout paid in year two from equity if targets are met. Exit equity is 800 in year five. Returns with and without the earnout paid?
6.Debt is 600 on 100 of EBITDA at close. In year three debt is 450 and EBITDA is 130. What is leverage, and what drove the change?
7.What is a commitment fee on a revolver?
8.What do you assume for transaction fees in a case if the prompt does not say?

Drill these with answers

What are the steps?

Every paper LBO follows the same order. Write the steps on your page before you start, so a nervous moment does not cost you the sequence.

Purchase price: entry multiple times EBITDA. Add fees if the prompt gives them.
Sources: debt as a multiple of EBITDA, and equity as the rest.
Each year: EBITDA minus D&A is EBIT; minus interest is pre tax income; minus tax is net income.
Free cash flow: net income plus D&A, minus capex, minus any increase in working capital.
Pay down debt with all of it, unless the prompt says otherwise. Next year's interest is on the lower balance.
Exit: exit multiple times final year EBITDA is enterprise value; minus remaining debt is exit equity.
Returns: MOIC is exit equity over entry equity. Convert to IRR with the rules of thumb.

How do you solve a full example?

Assumptions: EBITDA is 100 today and grows by 10 a year, to 150 in year five. Buy at 10x, so the price is 1,000. Debt is 5x EBITDA, 500, at 10% interest on the opening balance each year. Equity is 500. D&A and capex are both 20 a year, so free cash flow equals net income. Tax rate 25%. No working capital change, no fees. All free cash flow repays debt. Exit at 10x in year five.

Year 1: EBITDA 110, EBIT 90, interest 50, pre tax 40, tax 10, net income and free cash flow 30. Debt falls to 470. Year 2: EBITDA 120, EBIT 100, interest 47, pre tax 53, tax 13.25, free cash flow 39.75. Debt 430.25. Year 3: EBIT 110, interest about 43.0, pre tax about 67.0, free cash flow about 50.2. Debt about 380.0. Year 4: EBIT 120, interest 38.0, pre tax 82.0, free cash flow 61.5. Debt about 318.5. Year 5: EBIT 130, interest about 31.9, pre tax about 98.1, free cash flow about 73.6. Debt about 244.9.

Exit: 10x year five EBITDA of 150 is 1,500. Minus about 244.9 of debt leaves about 1,255 of exit equity. MOIC is 1,255 over 500, about 2.5x. Over five years, 2.5x is an IRR of about 20%.

Entry: price 1,000, debt 500, equity 500.
Total debt repaid over five years: about 255.
Exit: enterprise value 1,500, debt about 245, equity about 1,255.
Returns: about 2.5x MOIC, about 20% IRR.

Where did the return come from?

Break the equity gain of about 755 into its sources. EBITDA grew by 50, worth 500 at the 10x multiple. Debt paydown added about 255 to the equity, since every dollar of debt repaid is a dollar more for the equity holders at exit. The multiple was the same at entry and exit, so multiple expansion added nothing. 500 plus 255 is the 755.

Interviewers like this answer because it shows you know which levers a sponsor controls. Growth and paydown are earned; multiple expansion is the market's gift and the first thing to disappear in a bad exit.

Exit at 9x instead: exit equity about 1,105, about 2.2x, about 17% IRR.
Exit at 11x instead: exit equity about 1,405, about 2.8x, about 23% IRR.
Add 50 of fees paid with equity: equity in becomes 550, so about 2.3x and about 18% IRR on the same exit.

What are the IRR rules of thumb?

You convert MOIC to IRR in your head using a few anchors, then interpolate. These are rounded from the exact math (IRR is MOIC to the power of one over the years, minus one). Memorize the five year column first, since most paper LBOs run five years.

2x in 3 years: about 26%. 2x in 4 years: about 19%. 2x in 5 years: about 15%.
2.5x in 5 years: about 20%.
3x in 3 years: about 44%. 3x in 5 years: about 25%.
4x in 5 years: about 32%.
1.5x in 3 years: about 14%. 1.5x in 5 years: about 8%.
Rule of 72: money doubles in about 72 divided by the rate in years, so 2x in 5 years is about 72 over 5, roughly 14 to 15%.

What mistakes cost the most points?

Most mistakes are about order and bookkeeping, not hard math. Say each number out loud as you write it so the interviewer can follow, and so you catch slips.

Forgetting to subtract remaining debt at exit, which reports enterprise value as equity.
Charging interest on the original debt every year instead of the lower balance.
Taking tax on EBITDA instead of on pre tax income after interest.
Forgetting that fees raise the equity check.
Quoting IRR from MOIC without saying how many years.
Rounding too early, so a small error compounds over five years. Keep one decimal until the end.

Questions students ask

Can I use a calculator for a paper LBO?: Usually not. The numbers are chosen to be round. Some firms allow one for a longer modeling test, but practice without one.
How long should a paper LBO take?: About ten to fifteen minutes for a five year version with debt paydown. Simpler prompts with no paydown take two or three minutes.
What if the prompt does not give D&A or capex?: Ask. If they say to ignore them, free cash flow is EBITDA minus interest minus tax. State every assumption you make out loud.
What IRR should I aim for in the answer?: Whatever target the interviewer gives you. A common follow up is to name the target and ask what entry price, exit multiple, or growth would reach it. Work backward: target MOIC from the IRR anchors, then the exit equity that requires.
Is a paper LBO the same as a modeling test?: No. A modeling test builds a full LBO in Excel over an hour or more. The paper LBO is the same logic, simplified, done by hand in minutes.