Series 79 practice questionmediumLeveraged Buyouts
A private equity firm is evaluating a potential LBO target. Which of the following characteristics would make a company MOST attractive as an LBO candidate?
- AHighly cyclical revenue with volatile cash flows and high existing leverage
- BRapid revenue growth requiring substantial ongoing capital expenditures
- CStable, predictable cash flows, low existing debt, and significant tangible assets✓ Correct answer
- DA technology startup with no revenue but significant intellectual property
Explanation
Why C — Stable, predictable cash flows, low existing debt, and significant tangible assets
An ideal LBO candidate has stable, predictable cash flows to service the significant debt load, low existing leverage to provide capacity for additional borrowing, and substantial tangible assets that can serve as collateral for secured debt. Companies with these characteristics present lower risk to lenders and can support higher leverage ratios. Cyclical businesses, capital-intensive companies, and early-stage companies generally make poor LBO candidates due to cash flow uncertainty.
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