A leveraged buyout is an acquisition funded with a combination of debt and equity. The private equity sponsor uses the acquired company’s cash flow to repay debt, then seeks to sell the business later for more than its remaining net debt. A paper LBO is a simplified version of that analysis completed without a full spreadsheet, usually with a calculator or pen and paper.
Interviewers are testing more than arithmetic. They want to see whether you understand enterprise value, financing, cash flow and returns as one connected process. They also care about organization: a candidate who labels assumptions, keeps signs consistent and catches an unreasonable answer is safer in a live deal environment.