LBO Series · Guide 07

Quick-Reference Formula Sheet

Every formula you need for LBO modeling and PE interviews. IRR, MOIC, equity bridges, leverage ratios, coverage tests, and return attribution — all in one place.

Return Metrics

Internal Rate of Return (IRR)

IRR = (Exit Equity Value / Entry Equity Value)^(1/n) − 1

Where n = hold period in years. This is the annualized return on the equity investment. Target: 20%+ for most institutional PE funds.

Multiple of Invested Capital (MOIC)

MOIC = Total Distributions to Equity / Total Equity Invested

Also called "multiple on money" or "equity multiple." A 3.0x MOIC means you tripled your money. Does not adjust for time — use IRR when comparing deals of different hold periods.

Cash-on-Cash Return

Cash-on-Cash = Cash Distributions Received / Cash Invested

Similar to MOIC but specifically counts cash returned (not equity value at exit). Relevant for deals with interim dividends or dividend recapitalizations.

Quick IRR Approximation (Mental Math)

IRR ≈ MOIC^(1/n) − 1

Key reference points for 5-year hold:
2.0x MOIC → ~15% IRR | 2.5x → ~20% | 3.0x → ~25% | 4.0x → ~32%

Enterprise Value & Equity Value

Enterprise Value

EV = Equity Value + Net Debt + Preferred Stock + Minority Interest

Net Debt = Total Debt − Cash & Cash Equivalents. EV represents the total value of the business to all capital providers.

Equity Value from EV (Bridge)

Equity Value = EV − Total Debt + Cash − Preferred − Minority Interest

This is the "equity value bridge." In an LBO, at exit: Exit Equity = Exit EV − Remaining Debt.

Entry EV (Sources & Uses)

Purchase Price (EV) = Equity Contribution + Debt Raised + Rollover Equity − Excess Cash Used

Valuation Multiples

EV/EBITDA Multiple

EV/EBITDA = Enterprise Value / LTM EBITDA

The primary LBO valuation metric. Typical ranges: 7x–10x for industrials, 10x–15x for healthcare, 12x–20x+ for SaaS.

EBITDA

EBITDA = Revenue × EBITDA Margin = Net Income + Interest + Taxes + D&A

In LBO models, you'll often work with "Adjusted EBITDA" which adds back non-recurring items: one-time restructuring charges, stock-based comp (sometimes), management fees, etc.

Leverage & Credit Ratios

Leverage Ratio

Leverage = Total Debt / EBITDA

Expressed as "turns." 5.0x leverage = 5 turns of EBITDA. Typical range for LBOs: 4x–6x. Covenant tests usually cap at 6.0x–6.5x.

Interest Coverage Ratio (ICR)

ICR = EBITDA / Cash Interest Expense

Measures ability to cover interest payments. Lenders typically require minimum 1.5x–2.0x. Below 1.0x = covenant breach risk.

Fixed Charge Coverage Ratio (FCCR)

FCCR = (EBITDA − Capex − Taxes) / (Cash Interest + Required Amortization)

Stricter than ICR. Includes mandatory debt amortization. Typical covenant: FCCR ≥ 1.1x or 1.25x.

Debt Service Coverage Ratio (DSCR)

DSCR = EBITDA / (Interest + Principal Repayment)

Common in credit and real estate. Measures ability to service all debt obligations. Target: 1.2x–1.5x minimum for most lenders.

Free Cash Flow

Unlevered Free Cash Flow (UFCF)

UFCF = EBITDA − Taxes on EBIT − Capex − Change in Working Capital

Also called "free cash flow to firm" (FCFF). Used in DCF models. Does not include the effect of debt financing.

Levered Free Cash Flow (for Debt Paydown)

FCF = EBITDA − Cash Interest − Cash Taxes − Capex − ΔWorking Capital

This is the "cash sweep" available to pay down debt in an LBO model. Cash taxes are computed on EBT (after interest), not EBIT.

Equity Value Bridge (Return Attribution)

Return Attribution Framework

ΔEquity = Δ(Exit EV) + Debt Paydown

Δ(Exit EV) = Exit Multiple × Exit EBITDA − Entry Multiple × Entry EBITDA

Δ(Exit EV) = [EBITDA Growth × Entry Multiple] + [Exit EBITDA × Multiple Change]

Decompose returns into: (1) EBITDA growth contribution, (2) multiple expansion/compression contribution, (3) debt paydown contribution.

Debt Schedule Formulas

Cash Interest on Floating Rate Debt

Cash Interest = Beginning Debt Balance × (SOFR + Spread)

Use beginning-of-period balance for simplicity. More accurate models use average balance.

PIK (Payment-in-Kind) Interest Accrual

PIK Debt Balance = Beginning Balance × (1 + PIK Rate)

PIK interest is added to the principal balance instead of paid in cash. Common in mezzanine and second lien structures. Dramatically increases total debt at exit.

Reference: MOIC to IRR at Different Hold Periods

IRR by MOIC and Hold Period

MOIC	3 Years	4 Years	5 Years	6 Years	7 Years
1.5x	14%	11%	8%	7%	6%
2.0x	26%	19%	15%	12%	10%
2.5x	36%	26%	20%	16%	14%
3.0x	44%	32%	25%	20%	17%
4.0x	59%	41%	32%	26%	22%
5.0x	71%	50%	38%	31%	26%

← Paper LBO Guide Debt Schedule Walkthrough → Practice in Mock Interview