An LBO transaction makes sense from the viewpoint of all investors if the present value (of the cash flows to the firm or enterprise value,discounted at the weighted-average cost of capital,equals or exceeds the total investment consisting of debt,common equity,and preferred equity required to buy the outstanding shares of the target company.

Question

Quizplus · Accepted Answer

The key to a successful LBO is to ensure that the present value of the cash flows generated by the target company exceeds the total investment required to buy the outstanding shares of the company. This is because the cash flows are used to service the debt used to finance the transaction, and any excess cash flow represents a return on investment to equity investors. Therefore, an LBO transaction can create value for all investors if the cash flows are sufficient to cover the required investment.

An LBO Transaction Makes Sense from the Viewpoint of All