The two sources of value created by an LBO are:
A)the tax benefit of debt and increased sales.
B)lower tax and interest payments.
C)lower interest expenses and increased efficiency.
D)increased efficiency and the interest tax shield.
E)lower taxes and lower dividends.

Question

Quizplus · Accepted Answer

The two sources of value created by an LBO are increased efficiency and the interest tax shield. In an LBO, the new owner uses debt to buy out the existing owner(s) and becomes the majority shareholder. The interest on the debt is tax-deductible, creating an interest tax shield, which increases cash flow available to the firm. Additionally, the new owner will implement changes to streamline operations and increase efficiency, which can lead to increased profitability and cash flow.

The Two Sources of Value Created by an LBO Are