What is a commonly used target IRR in an LBO valuation example?

What is a commonly used target IRR in an LBO valuation example?

• A. 25%
• B. 5%
• C. 50%
• D. 100%

Answer: (A)

In an LBO valuation, the target IRR is the return equity investors expect after debt is paid and the company is sold. It serves as a hurdle that drives deal feasibility, since leverage magnifies equity returns but also increases risk. A widely used target is around a quarter per year. This level is challenging yet attainable under typical debt loads, operating improvements, and a reasonable exit multiple, making it a practical benchmark for modeling and comparing deals. It reflects the need to compensate for risk and illiquidity while still being achievable in a multi-year horizon. The alternative returns—much lower like five percent—don’t adequately reward the risk and capital intensity of leverage, while extremely high targets such as fifty percent or more would require exceptional performance or unlikely market conditions.

In an LBO valuation, the target IRR is the return equity investors expect after debt is paid and the company is sold. It serves as a hurdle that drives deal feasibility, since leverage magnifies equity returns but also increases risk. A widely used target is around a quarter per year. This level is challenging yet attainable under typical debt loads, operating improvements, and a reasonable exit multiple, making it a practical benchmark for modeling and comparing deals. It reflects the need to compensate for risk and illiquidity while still being achievable in a multi-year horizon. The alternative returns—much lower like five percent—don’t adequately reward the risk and capital intensity of leverage, while extremely high targets such as fifty percent or more would require exceptional performance or unlikely market conditions.