Series 79 practice questioneasyLBO Analysis - Debt Assumptions
In a leveraged buyout (LBO) analysis, which of the following will most likely increase the internal rate of return (IRR) for the equity sponsor, all else equal?
- AIncreasing the purchase price
- BUsing more debt in the capital structure✓ Correct answer
- CDecreasing the exit multiple
- DLengthening the holding period
Explanation
Why B — Using more debt in the capital structure
Using more debt (leverage) increases financial risk but can boost equity returns (IRR) as less equity is needed upfront. Increasing price, lower exit multiples, or a longer hold period tend to reduce IRR.
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