Debt Capacity and Purchase Price

This problem tests the candidate’s understanding of how leverage affects buying power in a private equity transaction. In an LBO, interviewers want to see that you know how debt and equity are combined, why borrowing increases the size of deal a sponsor can pursue, and how financing structure influences capital efficiency and future investment flexibility.

It also checks whether you can explain the strategic tradeoff behind using debt, not just the mechanics. Private equity firms use leverage to stretch their capital, preserve dry powder, and leave room for future portfolio actions such as follow on investments or add on acquisitions. That is a core concept in banking interviews because it connects financing structure to valuation, returns, and sponsor strategy.