Private Equity Interview Practice Test

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• In a simple model, how are depreciation and capital expenditures typically projected?
• How do add-on acquisitions create value in private equity, and what considerations ensure accretion post-transaction?
• Why is a write-down added back in the cash flow from operations?
• Which statement best explains the cash flow statement’s role in assessing liquidity and short-term obligations?
• What is the enterprise value for a company with EBITDA of 50 when the trading multiple is 5x?
• How does exit timing influence realized IRR, and why might PE firms seek exits around favorable leverage and market windows?
• How is working capital calculated?
• In an LBO, which factors determine the overall return realized by investors?
• Which elements define Competitive Advantage in Firm Specific Considerations?
• Before investing with IRR targets of 23% and 30%, what two questions should you ask?
• What are the typical value creation levers and risk factors for a healthcare services target, and how could regulation impact returns?
• In the free cash flow formula shown, which items are subtracted from EBITDA to compute free cash flow?
• In a waterfall with a preferred return, how would you verify that cash distributions allocate correctly over time?
• Which statement correctly describes a capital lease compared to an operating lease?
• Describe a time you faced an ethical dilemma at work and how you resolved it, and how you would handle potential conflicts in PE.
• Which signals a need for deeper due diligence on management incentives?
• For a software as a service business, which metrics are essential during due diligence and modeling, and how should ARR be considered relative to revenue recognition?
• If you could only have one financial statement, which would you choose?
• For a technology-enabled services target, what growth drivers and margin levers would you analyze during diligence?
• Which model assumes the acquisition of a company with a significant amount of borrowed funds?
• Why is it important to test sensitivity around WACC and perpetual growth rate in PE DCF models?
• Which of the following is NOT a good LBO target characteristic?
• Which of the following would NOT be added back to EBITDA as a non-recurring charge?
• When Accrued Compensation increases by $10, which statement best describes its impact on the income statement?
• Which statement best describes the items included in accumulated other comprehensive income (OCI)?
• In an equity bailout, which statement is true about the income statement?
• Which statement about acquisition comps is true?
• How does a typical private equity waterfall work, including preferred return, catch-up, and carried interest, and how do you model it in a financial forecast?
• Why does depreciation affect cash balance if it is a non-cash expense?
• In a scenario with tax depreciation of $20mm and asset depreciation of $10mm over 10 years, with a 21% tax rate, what is the impact on GAAP net income?
• What is the typical amortization profile for senior secured debt in PE buyouts, and how do revolvers interact in cash flow planning?
• Why would you raise equity versus debt?
• Dividend recap: what is it?
• Which tactic is recommended to combat powerful suppliers?
• CapEx of $100 with straight-line depreciation over 10 years and a 20% tax rate affects Year 0 and Year 1. Which description is correct for Year 1?
• In the enterprise value calculation, which item is added to equity value to reflect financing structure?
• When modeling an add-on acquisition, which steps help ensure synergies are realistic?
• A company orders $10 of inventory and pays cash, but has not manufactured or sold yet. Which of the following best describes the effects on the three financial statements?
• Adding a bolt-on investment costing $400 for a $50 EBITDA business with sale in year 5, assuming no change in exit multiple, how do the overall returns compare?
• Can goodwill increase under GAAP?
• What would you monitor post-close to measure synergy realization?
• You have $100 in cash. Which metric should you measure to determine the best use of the cash?
• Why are depreciation and amortization added back to net income on the cash flow statement?
• Which tranche typically carries the highest risk and highest expected return in PE financing, and why?
• Which formula correctly determines ending retained earnings?
• In a discounted cash flow analysis, what is the nature of free cash flow that is used?
• What is the approximate IRR if a 2.2x MOIC is achieved over five years?
• Which statement about equity value and shareholders' equity is true?
• If a company receives a $100 equity bailout, which statement is true?
• GAAP vs tax accounting: which statement is true?
• Which of the following is a factor used to gauge a company's competitive position?
• If depreciation expense is $10 pre-tax, what is the effect on the three financial statements?
• Which red flag indicates potential governance concerns?
• When assessing management quality, which factor is explicitly recommended to review?
• How does a change in exit multiple or holding period affect IRR and MOIC in an LBO model?
• A company had positive EBITDA over many years but recently went bankrupt. Which factor is most consistent with this outcome?
• How do you assess debt capacity for an LBO target, and what are the key coverage and leverage metrics to monitor?
• Can enterprise value be negative?
• In a PE financing, which tranche is typically the riskiest and offers the potential for the highest returns?
• Which of the following components is included in the enterprise value calculation?
• In an investment assessment, the Macro trends section focuses on which of the following?
• Which of the following is listed as a factor when gauging a company's competitive position?
• In considering the difference between tax depreciation and book depreciation with a 21% tax rate, what is the approximate deferred tax liability?
• When applying price-to-free-cash-flow (FCF) multiples, which value should be used with unlevered FCF?
• Why do PE models often rely on EBITDA as a starting point, and what adjustments are typically made to arrive at sustainable cash flow?
• Which factor most strengthens barriers to entry?
• In a simple 3-statement projection, which rule is commonly used for projecting accounts receivable (AR)?
• What are comps in valuation?
• What is the purpose of accretion/dilution analysis?
• Why is cash subtracted from enterprise value?
• To predict cash flows, which calculation is suggested?
• Which document typically accompanies an investment decision and includes valuation, due diligence findings, financing plan, exit strategy, risk mitigation?
• What does equity value describe?
• Which of the following statements correctly describes how items on the income statement and balance sheet are connected?
• Why apply a control premium when using public comps for valuation?
• Which items should you adjust when converting EBITDA to sustainable free cash flow in private equity modeling?
• If a $100 PIK note is called at year 5 and you originally paid $100, what is the approximate IRR?
• MOIC to IRR conversion: Doubling your money in 3 years corresponds to which approximate IRR?
• Which statement correctly describes the typical relationship between equity value and shareholders' equity for healthy companies?
• What is the purpose of a catch-up mechanism in PE waterfall?
• When using comps or precedent transactions, how should you account for potential synergies or cost savings from add-ons or platform exits?
• Where does depreciation appear on the income statement?
• In a typical LBO, what percentage of the purchase price is financed by debt?
• Which would be considered a red flag prompting further scrutiny?
• Which item directly addresses the clarity of a company's long-term strategic plan in management assessment?
• How would you respond to a question about why you want to work in private equity, and how would you tailor your answer to the firm?
• Which red flag would prompt further scrutiny specifically for potential conflicts of interest?
• Which framework is used during Industry assessment?
• What is the term for the excess of market value over book value in purchase accounting?
• What is the formula for the terminal value in the perpetuity growth method?
• When you write down an asset, what happens to pre-tax income?
• What are common mistakes when projecting exit multiples in PE modeling?
• Why might depreciation and amortization differ between the income statement and the cash flow statement?
• When selling PP&E at a gain, how does it affect the cash flow statement?
• Which combination of factors can lead to negative enterprise value according to the material?
• If a portfolio company sells at a 2.0x exit multiple versus an alternative floor due to strategic buyer synergy, how would you decide on the optimal exit path?
• How do book depreciation and tax depreciation differ?
• Which area best describes governance in evaluating management quality?
• How can a firm deter new entrants?
• Which scenario is not a contributor to negative working capital?
• To value levered FCF, which measure is appropriate?
• What does a DCF valuation calculate?
• In modeling cap tables with multiple rounds, how should you treat option pools to preserve economics?
• Which is a red flag that warrants extra scrutiny due to potential conflicts of interest?
• Which of the following is NOT part of gauging industry attractiveness?
• Under Consumer / Customer considerations, which questions are evaluated?
• Which validation steps help ensure synergy realism in an add-on transaction?
• Compare covenant-lite and traditional debt covenants in PE financing, highlighting risk/benefit trade-offs.
• According to the material, if capital markets are cheap, what financing strategy is favored to deploy cash?
• What does shareholders' equity represent?
• In the Change in Working Capital component of the free cash flow formula, which items are included?
• Under GAAP vs tax depreciation, which statement is true?
• How do net operating losses (NOLs) affect a company's 3 statements in a simple projection?
• What long-term growth rate is typically assumed in the perpetuity growth method?
• Which of the following is listed as a method to value a company?
• With EBITDA of 50 and a 5x trading multiple, what is the enterprise value?
• How are the balance sheet and the cash flow statement linked?
• In a private equity model, how should sustaining capex be treated in calculating free cash flow compared with growth capex?
• What elements are included in the Customer snapshot?
• How would you use public market comps to cross-check a private equity investment's valuation, and what adjustments would you apply?
• When applying FCF multiples to levered FCF, which value should you use?
• Which of the following is a common risk in a public-to-private deal?
• How would you estimate the WACC for a private company according to the material?
• Which of the following is a reason EV/EBITDA multiples would differ between two companies in different industries?
• Which items flow into Additional Paid-In Capital (APIC)?
• Net income affects retained earnings by which of the following?
• What is a management rollover equity, and what are its advantages and risks in PE transactions?
• Ending cash balance on the cash flow statement corresponds to what on the balance sheet?
• How do management fees and carried interest typically structure across PE funds, and what is their impact on sponsor economics over the fund life?
• If you sell inventory on credit for $10mm with a cost basis of $5mm, what is the net income impact after tax (20% rate)?
• How do you combat powerful customers?
• What does the acronym WACC stand for, and what is it used for in valuation?
• Year 0 impact of a $100 PIK note with a 10% rate on the income statement, cash, and debt is which of the following?
• If you could only have two financial statements, which pair would you select?
• With $10 of interest expense and a 20% tax rate, what is the effect on net income?
• Which item is most directly tied to aligning incentives with performance?
• MOIC to IRR conversion: Doubling your money in 2 years corresponds to which approximate IRR?
• How is working capital defined?
• What are the two primary return metrics used in private equity?
• In accretion/dilution analysis, pro forma earnings per share are typically projected for which years?
• Investment A with EBITDA of $10 million and entry multiple 5x results in an entry price of what?
• What tends to drive private market multiples higher than public ones?
• Which item is explicitly tied to retaining key management and is commonly reviewed to assess incentive alignment?
• Which condition can contribute to negative enterprise value?
• How should a company respond to substitutes?
• Which of the following is a way to capture returns in an LBO?
• Why does a change in inventory not affect the income statement immediately?
• Accumulated Other Comprehensive Income (OCI) can include which of the following?
• When would you invest in a company with fixed costs versus variable costs?
• In the terminal value method that uses a multiple, which metric is commonly used (sometimes NI)?
• Accretion/dilution percent is calculated as which formula?
• A DCF can be very useful as a measure of intrinsic value when used with which other tools?
• In a DCF valuation, what are the key steps to estimate the terminal value, and how do you choose the perpetuity growth rate?
• What is the role of an investment committee in private equity, and what documentation is typically prepared to obtain approval?
• In evaluating LBO debt, which statement correctly describes Net debt / EBITDA and DSCR?
• What is a capital call, and how does capital call timing affect portfolio cash management and fund performance?
• What is the enterprise value (EV) implied by a comps-based TEV calculation when a company has $100 million EBITDA, comps trade at 10x, next year requires $80 million in additional working capital and incurs $20 million in cash litigation expense?
• What are the four 'C's in the framework?
• Why is a DCF not a good measure of value on its own?
• Two-tier debt structure: First Lien 200 and Second Lien 100. Where does the Second Lien trade in this setup?
• Difference between pooling and purchase accounting?
• In an LBO valuation, why might the value be lower than a DCF with the same assumptions?
• Which would be considered a red flag prompting further scrutiny?
• What are common pitfalls when building a DCF model for private equity, and how can you mitigate them?
• When a liability is written down by $100, which statement best describes the income statement effect?
• Investment A: EBITDA of $10 million, entry multiple of 5x, capex of $5 million. Investment B: EBITDA of $10 million, entry multiple of 8x, capex of $1 million. Which investment should you choose?
• Which item is explicitly recommended to review when assessing the quality of management in a private equity consideration?
• What does PV of FCFs plus terminal value yield in a DCF analysis?
• What does a yield curve map?
• Why are working capital adjustments important in an LBO, and how do you normalize working capital when valuing or modeling a target?
• What are typical sources and uses in a standard PE buyout, and how would you structure debt tranches to optimize return and risk?
• Why would you subtract only excess cash from EV rather than all cash?
• If Accrued Compensation increases by $10, what is the balance sheet effect?
• In Porter’s Five Forces, which condition indicates strong supplier power?
• Explain the mechanics of carried interest, hurdle rate, catch-up, and how clawbacks operate in PE fund distributions.
• What is the purpose of a revolver in PE financing?
• What is PIK interest, and what are the implications of PIK debt on cash flow, leverage, and equity returns?
• What does APIC stand for in accounting?
• Which example illustrates entrenched growth drivers?
• Which of the following is commonly added back to EBITDA as a non-recurring charge?
• Which valuation multiple is stated as taking financing structure into account?
• In evaluating management, which item should you review as part of the governance process?
• Which type of institution is given as an example that can have large cash balances leading to negative EV?
• When should you capitalize a purchase rather than expense it?
• If you run a DCF and an LBO with the same assumptions, should you arrive at the same value?
• Year 0 balance sheet effect of a $100 CapEx funded with cash would show which of the following?
• What aspects are evaluated under Management Team & Culture?
• Why do we look at both equity value and enterprise value?
• If two companies have the same cash flow, which would you prefer to invest in?
• Why is bank debt maturity shorter than subordinated debt maturity?
• With an enterprise value of $1,100 million and annual interest expense of $20 million financed at a 10% cost of debt, what is the implied equity value, assuming no cash?
• What is a leveraged recapitalization, and what signaling effect does it have on management, lenders, and the market?
• A bond with an 8% coupon trades at 80 cents on the dollar. What is the current yield?
• Which type of comps provides a better indication of value in present time?
• What unique risks and opportunities exist in a public-to-private deal when valuing a target, and how should you model the equity risk premium?
• How do you model a private equity investment on a cap table when multiple rounds occur, and how does pre-money vs post-money affect ownership?
• Which condition indicates a good investment when comparing cost of capital to ROA?
• Why are private market multiples typically higher than public market multiples?
• Which item is included in Shareholders' Equity?
• What is the practical use of the working capital metric?
• Which statement differentiates the income statement from the cash flow statement?
• To compete against established rivals, a company should:
• In PE distributions, what is the purpose of a catch-up provision?
• What is the difference between accounts receivable and deferred revenue?
• What are the essential components of a private equity data room, and how should you prioritize due diligence requests?
• In a SaaS business, which metrics are most important for due diligence, and how should you treat ARR versus revenue recognition?
• Which external factors should be considered as mitigating factors in an investment assessment?
• Unlevered FCF excludes which item?
• How do you select comps and precedent transactions for a PE valuation, and what adjustments do you make for size, growth, and capital structure differences?
• What is the chance we get it right when we pick a CEO, given 10% can do work and we can identify with 80% accuracy?
• How do taxes affect the exit strategy, including capital gains taxes and company-level taxes, and what strategies might you employ to optimize after-tax returns?
• What is included in Additional Paid-In Capital (APIC)?
• Which scenario can contribute to negative working capital?
• Which area is specifically associated with governance in evaluating management quality?
• How does owning a controlling stake affect the use of non-GAAP adjustments or normalization in an LBO model?
• What is the point of OID?
• In revenue modeling, which approach is more commonly used in practice?
• An investor pays $500 in year 0 for an asset and receives $1,100 in year 5. What is the base cash-on-cash multiple (MOIC) for this investment?
• MOIC to IRR conversion: Doubling your money in 4 years corresponds to which approximate IRR?
• What is a key risk when using covenant-lite debt in PE financing?
• Which metric explicitly accounts for the time value of money and is commonly used to compare different exit scenarios?
• Levered FCF includes which item?
• Explain the difference between IRR and MOIC, and when each is most informative for evaluating a private equity investment.
• Which tax strategy is commonly used to optimize after-tax returns at exit by aligning with favorable capital gains treatment and potential step-up basis?
• Can a company have negative shareholders' equity?
• Cash collected for amounts not yet revenue is accounted for as what on the balance sheet, and when does it become revenue?
• Which of the following is a sector-specific value creation lever for a consumer packaged goods target?
• What is a limitation of debt tax shields on enterprise value in highly leveraged buyouts?
• A $100 PIK note with 10% rate compounds to year 5. What is the approximate balance at year 5?
• Which item is among the recommended elements to review for management quality?
• What does the treasury method assume about proceeds from in-the-money options?
• The material notes that negative EV can occur for companies on the brink of bankruptcy.
• Which of the following is an exit opportunity in private equity?
• Which of the following is a factor used to analyze industry profitability?
• What areas are covered by Supply Chain Analysis?
• In a leveraged buyout, how does high leverage influence bankruptcy risk and financial flexibility?
• Which of the following is a characteristic of a good LBO target?
• How would you model the impact of a sudden 200 basis point increase in interest rates on the debt service coverage and IRR of a buyout?
• In healthy companies, which is typically larger?