LBO investors must be very careful not to overpay for a target firm because

Question

Quizplus · Accepted Answer

LBO (Leveraged Buyout) investors must be cautious not to overpay for a target firm due to several reasons. Major competitors might become more aggressive when they see a firm taking on large amounts of debt (A), making it harder for the acquired firm to compete. High leverage indeed increases the break-even point of the firm (B), meaning it needs to generate more revenue to cover its fixed and variable costs before it can start making a profit. Additionally, projected cash flows can be subject to significant errors (C), which can limit the firm's ability to repay its debt, especially if the projections were overly optimistic. All these factors combined (A, B, and C) make it crucial for LBO investors to carefully evaluate their investment to ensure it can withstand these pressures.

LBO Investors Must Be Very Careful Not to Overpay for a Target