Paper LBO: How to Solve One in an Interview
How to solve a paper LBO in 5 to 10 minutes with no Excel: assumptions, sources and uses, projections, exit, and the IRR and MOIC mental math shortcuts.
Jun 12, 2026 · 8 min read
A paper LBO is a timed pen-and-paper exercise where you estimate a private equity deal's IRR and MOIC using only mental math, usually in 5 to 10 minutes. The interviewer hands you a short prompt (entry multiple, EBITDA, leverage, growth, exit multiple) and watches how you reason. To solve a paper LBO you run five quick steps: set the entry price, split sources and uses into debt and equity, project EBITDA and free cash flow over the hold, calculate exit equity value, then approximate IRR from MOIC using memorized benchmarks. This isn't the conceptual LBO walkthrough; it's the arithmetic version, and clean structure plus rounded numbers beats decimal precision every time.
TL;DR
- A paper LBO is solved in 5 to 10 minutes with no Excel, just mental math.
- 5 steps: entry price, sources and uses, projections, exit equity, IRR and MOIC.
- Memorize the 5-year benchmark: 2.0x MOIC is roughly 15% IRR, 3.0x is roughly 25% IRR.
- Use the Rule of 72: years to double is about 72 divided by the annual return.
- Round aggressively. Interviewers test structure and logic, not two-decimal accuracy.
What is a paper LBO?
A paper LBO is a simplified leveraged buyout you calculate by hand to test whether you understand how a deal generates returns. You get a brief prompt and 5 to 10 minutes to arrive at an implied IRR and MOIC, working only with pen, paper, and rounded arithmetic. It strips an LBO down to its skeleton: buy a company with debt and equity, grow EBITDA and pay down debt over a five-year hold, then sell. The interviewer isn't checking your calculator skills. They're checking that you know the returns drivers and can hold a logical structure under time pressure. For the broader conceptual answer that often precedes this exercise, see walk me through an LBO, and for where it sits among the rest of the round, the investment banking technical interview questions guide.
What are the five steps to solve a paper LBO?
The five steps are: (1) calculate the purchase price from the entry multiple, (2) split the funding into debt and equity in sources and uses, (3) project EBITDA growth and rough free cash flow over the hold, (4) calculate exit equity value from the exit multiple, and (5) approximate IRR from MOIC. Run them in that order, narrating as you go.
The discipline that wins is rounding. If EBITDA grows from one hundred dollars to roughly one hundred and twenty-eight dollars over five years, call it one hundred and thirty and move on. Interviewers expect you to simplify; the worst outcome is freezing on long division. Keep the number of moving parts low, state your assumptions out loud, and the math stays manageable in your head.
How do you set up sources and uses?
Sources and uses is the table that shows where the money comes from (sources: debt plus sponsor equity) and what it buys (uses: the purchase price plus fees). In a clean paper LBO, uses equals the entry enterprise value, and you fund it with a stated leverage ratio. If the prompt says five times EBITDA at sixty percent debt, debt and equity fall out immediately.
Take a company with one hundred dollars of EBITDA bought at five times. Entry enterprise value is five hundred dollars. At sixty percent leverage, debt is three hundred dollars and the sponsor's equity check is two hundred dollars. That two hundred dollar equity number is the denominator for your entire returns calculation, so anchor it. The formula is simply:
How do you project cash flow and pay down debt?
Project EBITDA forward at the stated growth rate, then estimate free cash flow as a rough share of EBITDA after interest, taxes, and capex. In a paper LBO you don't build a full schedule; you approximate cumulative free cash flow over the hold and use it to pay down debt. Less debt at exit means more value flows to equity.
Continuing the example: grow one hundred dollars of EBITDA at five percent a year for five years and you reach roughly one hundred and twenty-eight dollars, which you round to one hundred and thirty. Suppose you estimate that the business throws off about one hundred dollars of cumulative free cash flow over the five years after interest, taxes, and capex, all used to repay debt. Starting debt of three hundred dollars minus one hundred dollars of paydown leaves two hundred dollars of debt at exit. That deleveraging is one of the three returns drivers, alongside EBITDA growth and multiple expansion.
How do you calculate exit equity, IRR, and MOIC?
Calculate exit enterprise value by applying the exit multiple to final-year EBITDA, subtract the remaining debt to get exit equity, then divide exit equity by entry equity for MOIC. Convert MOIC to IRR using memorized five-year benchmarks rather than computing it exactly.
Finish the example. Exit at the same five times multiple on one hundred and thirty dollars of EBITDA gives an exit enterprise value of six hundred and fifty dollars. Subtract the two hundred dollars of remaining debt and exit equity is four hundred and fifty dollars. Against the two hundred dollar entry equity, that's a MOIC of:
A 2.25x MOIC over five years sits between the 2.0x (roughly 15% IRR) and 2.5x (roughly 20% IRR) benchmarks, so you'd quote an IRR of about 17 to 18 percent. State the range confidently; nobody expects a precise figure in your head.
What are the mental math shortcuts to memorize?
Memorize two things and the IRR step becomes trivial. First, the five-year MOIC-to-IRR benchmarks. Second, the Rule of 72 for sanity checks. Together they let you quote an IRR in seconds without a calculator.
| 5-Year MOIC | Approx IRR |
|---|---|
| 1.5x | ~8% |
| 2.0x | ~15% |
| 2.5x | ~20% |
| 3.0x | ~25% |
| 3.5x | ~28% |
The Rule of 72 estimates how long money takes to double: years to double is about 72 divided by the annual return. At a 20 percent return, money doubles in roughly 3.6 years (72 divided by 20). So a deal that more than doubles your equity in five years is comfortably above a 15 percent IRR. Cross-check your MOIC against these and you'll catch arithmetic slips before the interviewer does. The same statement mechanics that drive free cash flow here are laid out in how the three financial statements link, and the discounting logic carries over to walk me through a DCF.
Frequently Asked Questions
How long should a paper LBO take?
Between 5 and 10 minutes. Most interviewers give you scratch paper and a short prompt, then either watch you work or step out and return. The time limit is part of the test, so practice hitting a clean answer inside ten minutes rather than chasing precision.
Do I need a calculator for a paper LBO?
No. The entire point is mental math. Prompts use round numbers (five times entry, sixty percent debt, five percent growth) precisely so the arithmetic stays doable in your head. Asking for a calculator signals you've missed what the exercise is testing.
What's the difference between a paper LBO and a full LBO model?
A full LBO model is a detailed Excel build with a debt schedule, full three-statement projections, and exact IRR. A paper LBO is the same logic compressed into rounded mental math with no spreadsheet. The paper version screens for whether you understand the framework before anyone lets you build the model.
What MOIC and IRR signal a good deal?
Private equity firms typically target an IRR around 20 to 25 percent and a MOIC near 2.5x to 3.0x over a five-year hold. If your paper LBO lands well below those, sanity-check your assumptions; if it lands far above, you may have been too aggressive on growth or multiple expansion.
What's the most common mistake in a paper LBO?
Freezing on the arithmetic or forgetting to subtract remaining debt at exit. Candidates get the entry right, project EBITDA, then quote exit enterprise value as if it were equity. Always bridge from exit enterprise value to exit equity by subtracting the debt that's still outstanding.
Should I narrate while I solve it?
Yes. Talk through each step as you write it. Interviewers grade your reasoning as much as your answer, so a clear running commentary, "entry EV is five hundred, debt is three hundred, so equity is two hundred," shows structure even if your final number is slightly off.
Sources
- Wall Street Prep: Paper LBO Tutorial (checked June 2026)
- Corporate Finance Institute: Paper LBO Example (checked June 2026)
- 10X EBITDA: Paper LBO Example Walk-Through (checked June 2026)
- Street of Walls: Paper LBO Model Example (checked June 2026)