Which of the following statements is most CORRECT regarding Leveraged Buyouts (LBO's)?

Question

BlackTom AI · Accepted Answer

The question asks which statement is most correct about Leveraged Buyouts (LBOs). 
Option 1: 'Leveraged buyouts (LBO's) occur when a firm issues equity and uses the proceeds to take over a target firm.' This is misleading because LBOs rely heavily on debt financing, not primarily on issuing equity. While some equity is typically involved to provide a stake and align incentives, the defining feature is the large debt load used to finance the acquisition, not new equity funding. 
Option 2: 'Firms are forbidden by law to sell any assets during the first five years following a leverage buyout.' There is no general legal prohibition that imposes a five-year asset-sell ban after an LBO. Operational and fiduciary constraints may exist from covenants or financing agreements, but blanket legal prohibitions of this nature do not apply universally. Thus this statement is inaccurate. 
Option 3: 'LBO's typically use a lot of debt financing.' This captures the core characteristic of most LBOs: funding the acquisition primarily through debt (high leverage) with a relatively smaller equity contribution from the buyers. This aligns with common financial theory and practice surrounding LBOs. 
Option 4: 'B and C are correct.' Since Option 2 is false, pairing it with Option 3 would render this statement incorrect. Therefore, this option cannot be correct because it relies on both B and C being true, while B is not. 
In summary, the reasoning shows that the statements vary in accuracy: the equity-centered description in Option 1 contradicts the debt-heavy nature of LBOs, Option 2 asserts an unfounded legal restriction, Option 3 accurately describes typical LBO financing, and Option 4 incorrectly combines a false claim with a true one. The most defensible true statement among the choices is the one describing heavy use of debt financing, which is the essence of LBO structures.

Investment Banking - FIN-6950 - BOS1 Knowledge Check #2 (Remotely Proctored)

Which of the following statements is most CORRECT regarding Leveraged Buyouts (LBO's)?

View Explanation

Log in for full answers

Similar Questions

Regarding private equity and the valuation of LBOs, select the correct statement:

Which of the following statements regarding LBOs is incorrect?

An ideal LBO target would be unlevered, inefficiently managed, with stable cash flows, low required capital expenditures, and significant excess non-core assets.

In an LBO deal, which of the following is NOT a desired feature of an ideal LBO “target” company?

In an LBO model, which of the following would increase the IRR for the sponsor without improving the company’s performance?

Assuming the overall economy can remain strong for the next five years, PE firms that finance LBOs with maximum debt capacity will likely experience a higher IRR on their equity investment than PE firms that use modest leverage on their LBO deals.

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler