Which statement best describes leveraged buyouts (LBOs)?
A) LBOs occur when a firm issues equity and uses the proceeds to take a firm public.
B) In a typical LBO, bondholders do well but shareholders see their value decline.
C) Firms are forbidden by law to sell any assets during the first five years following a leverage buyout.
D) The objective is to take the firm public again or to sell to others in a few years after boosting the firm's value through efficient management.

Question

Quizplus · Accepted Answer

Leveraged buyouts (LBOs) involve a company being acquired largely through the use of debt financing. The objective is to use the acquired company's assets, cash flows, and/or operations to repay the debt over time. The goal of the LBO is to create value for the private equity firm that led the acquisition by boosting the acquired company's value through efficient management, and then either taking the company public again, or selling it to another buyer for a profit. Option A is incorrect because LBOs involve the purchase of a company, not the issuance of equity. Option B is incorrect because shareholders, not bondholders, typically benefit from an LBO. Option C is incorrect because firms are not typically prohibited from selling assets after an LBO, although doing so would reduce their ability to generate cash flows to repay their outstanding debt.

Which Statement Best Describes Leveraged Buyouts (LBOs)