Capex and Working Capital Requirements

This problem practices how to evaluate a target’s cash needs in an LBO model, especially the impact of capital expenditures and net working capital on cash flow. Candidates need to understand why these items matter to a buyer using leverage: cash spent on maintaining or growing the asset base, and cash tied up in operations, both reduce the amount available for debt service and equity returns. Interviewers ask this because it tests whether you can connect operating assumptions to financing capacity, understand what makes a business attractive to a financial sponsor, and recognize when a company may be too cash intensive for a leveraged transaction.