medium · Investment Banking valuation-core

A company has $100 million in Net Operating Losses (NOLs). In an LBO, how do these NOLs affect the IRR?

1. They have no impact because LBOs are structured as fully tax-exempt transactions overall.
2. They increase IRR by reducing cash tax payments, thus increasing FCF available for debt repayment.
3. They increase IRR indirectly by boosting the company's reported EBITDA margin each fiscal year cycle.
4. They decrease IRR because utilizing the NOLs against income actually raises the company's effective tax rate.

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