At work so quick response here… 1) First, w.r.t. IRR, the rate of return is on the equity you put into the deal - the more debt used to finance the deal, the less equity required. Less equity, same return = higher return on equity. Second, the answer is generally neither FCFE or FCFF. IRR is primarily based upon the exit price when the company is sold. FCF is typically used to pay down debt, not provide a return to PEs. Once the debt is paid down, PE can sell or recapitalize with more debt and take the funds out of the company for a return. 2) You have already answered yourself, debt is cheaper than equity. Sure borrowing rates are higher (especially on sub-debt) but so is the required return on equity in this market. 3) Yes, comps are used. Purchase price from the buyer’s perspective is NEVER justified solely on comps. As you know, comps are not always representative and may reflect synergy premiums, deal structure issues that inflate multiples (i.e. earnouts, VTBs), different economic environment, etc. DCF / IRR model is generally used by the buyer with intense scrutiny over the seller’s projections of sustainable earnings. Buyers don’t generally focus on multiples, sellers do. Buyers focus on the rate of return they are seeking and whether the transaction has a high liklihood of providing it. The multiple is secondary. 4) Once a PE has achieved its target return, it is generally happy to dispose of a business, even if it so happens to be a very good business. PEs have LP investors and the fund has a limited time frame (may be 5 to 10 years). So they cannot hold investments too long, as they must provide a return to the LPs and eventually close out the fund. Even if the business has a bunch of free cash flows not being used. The PE will generally recap (add debt) and pull out more than a dividend.