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)?

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