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

Question

BlackTom AI · Accepted Answer

To start, let's lay out the scenario: in an LBO deal, the target company is evaluated for features that will support high debt levels and generate strong, predictable cash flows post-acquisition.
Option 1: High capital expenditure projects in the near future. This is not desirable because near-term heavy capex typically consumes cash, reduces free cash flow, and can mask the true ability of the business to service debt after the buyout. It introduces risk and reduces flexibility for debt repayment and value creation.
Option 2: Stable expected future operating cash flows. This is highly desirable in an LBO context, since predictable, steady cash flows underpin the ability to service debt and support interest/principal payments over the holding period.
Option 3: Opportunities for immediate or near-term cost cutting opportunities and efficiency improvements. This is also desirable because capturing quick wins in operating leverage can boost margins and free cash flow, enhancing debt capacity and IRR.
Option 4: Strong asset base. A robust asset base can provide collateral support for debt, potentially enabling better financing terms and a cushion if performance dips, which is advantageous in an LBO.
In summary, the presence of near-term high capex is the outlier among the listed features, as it clashes with the LBO objective of maximizing free cash flow and debt service capacity in the near term.

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

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

查看解析

登录即可查看完整答案

类似问题

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.

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

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.

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单