Series 79 practice questionmediumLBOs and MBOs
What is the defining feature of a leveraged buyout?
- AThe seller receives only stock
- BThe buyer is always the incumbent CEO
- CThe target must be in bankruptcy
- DA significant portion of the purchase price is financed with debt that is expected to be serviced by the target’s cash flows✓ Correct answer
Explanation
Why D — A significant portion of the purchase price is financed with debt that is expected to be serviced by the target’s cash flows
A significant portion of the purchase price is financed with debt that is expected to be serviced by the target’s cash flows LBOs use debt to amplify equity returns, with lenders looking to the target’s cash generation for repayment. That financing structure makes leverage capacity a central underwriting question.
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