Just wondering, when modelling LBOs is it market practice to assume you:
a) amortise debt & forsake dividends over the holding period in favour of lower interest expense & a higher equity value at exit,
or
b) pay dividends & forsake debt repayment over the holding period in favour of a (slightly) higher IRR over the life of the investment
I assume it's a) because that slight bump in IRR from taking option b) is not worth the risk in the event the chit hits the fan and your cash flow drops for whatever reason and you struggle to meet your mandatory debt service. Can someone confirm/deny, or even modify my options?
Would especially appreciate insight of people who work in PE.
