hard · Investment Banking

Ignoring any change in the interest rate, default risk, or cash sweep, why is the associate RIGHT that IRR rises -- yet the multiple-of-money (MoM) gain is smaller than a novice would guess?

1. The extra turn shrinks the entry equity check, magnifying the percentage return on a fixed dollar of value creation, but because exit equity is reduced by the same extra turn of debt still outstanding, the absolute equity gain barely changes -- so MoM is amplified far less than the IRR percentage suggests
2. The extra turn raises exit equity one-for-one because the higher leverage forces a larger cash sweep, so both IRR and MoM rise proportionally and the associate has merely understated the MoM benefit
3. The extra turn lowers the entry multiple paid, reducing goodwill and the writedown drag at exit, which is what lifts IRR while leaving the equity check unchanged
4. The extra turn increases interest expense, lowering taxable income and raising the tax shield enough that the after-tax equity gain more than doubles, making MoM rise faster than IRR

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