What is the resulting capital structure after an LBO if prior to the deal the firm had $225M in equity and $10M in debt, and the acquiring group bought the company's stock at book value contributing $20M of its own money and borrowing the rest?
A)Debt $10M; Equity $215M
B)Debt $215M; Equity $10M
C)Debt $215M; Equity $20M
D)Debt $225M; Equity $10M

Question

Quizplus · Accepted Answer

In an LBO, the acquiring group buys the company using a combination of equity (their own money) and debt. In this scenario, the acquiring group contributed $20M of their own money and borrowed the rest to buy the company's stock at book value. Therefore, the new capital structure will include the $10M in debt that the company had prior to the deal, plus the additional debt that was borrowed by the acquiring group to finance the purchase. The equity portion will consist of the $20M contributed by the acquiring group. Therefore, the resulting capital structure will be Debt $215M and Equity $20M.

What Is the Resulting Capital Structure After an LBO If