In a Leveraged buyout (LBO):
A)an acquiring company uses a great deal of debt to acquire a debt free target.
B)private investors buy the company's stock using debt that's secured by the firm's own assets.
C)the target's debt is eliminated by the buyer's leverage resulting in a debt free company.
D)the buyers purchase the stock with their own money which leaves them free to borrow heavily using their stock as collateral.

Question

Quizplus · Accepted Answer

In an LBO, private investors use debt to purchase a company's stock. This debt is typically secured by the assets of the company being acquired, rather than the assets of the buyers themselves. The goal of the LBO is to use the company's own assets to finance the purchase and maximize returns for the buyers. Option A is incorrect because the acquiring company may already have debt on its balance sheet and may not use all debt to acquire the target. Option C is incorrect because even though a majority of the target's debt may be eliminated, the buyer may still take on some debt in the process. Option D is also incorrect because the buyers typically use debt, not their own money, to finance the LBO.

In a Leveraged Buyout (LBO)