What is determined in the Sources and Uses of Funds step in an LBO model?

What is determined in the Sources and Uses of Funds step in an LBO model?

• A. Exit assumptions
• B. Cash flow projections
• C. The amount and type of debt to raise and equity payment
• D. Sensitivity analysis

Answer: (C)

In an LBO model, the Sources and Uses step lays out how the deal is financed. Sources show where the money comes from—different debt facilities and the sponsor’s equity contribution—while Uses show how those funds will be spent, such as the purchase price, refinancing or repayment of existing debt, and transaction fees. The key determination here is the amount and type of debt to raise and the equity payment from the sponsor, because these financing choices set the leverage, risk, and potential returns of the deal. Exit assumptions, cash flow projections, and sensitivity analysis are handled in other parts of the model, not in this step.

In an LBO model, the Sources and Uses step lays out how the deal is financed. Sources show where the money comes from—different debt facilities and the sponsor’s equity contribution—while Uses show how those funds will be spent, such as the purchase price, refinancing or repayment of existing debt, and transaction fees. The key determination here is the amount and type of debt to raise and the equity payment from the sponsor, because these financing choices set the leverage, risk, and potential returns of the deal. Exit assumptions, cash flow projections, and sensitivity analysis are handled in other parts of the model, not in this step.