LBOs often exhibit very high financial returns during the years following their creation. Which of the following best describes why this might occur?
A. LBOs invariably improve the firm’s operating efficiency
B. LBOs tend to increase investment in plant and equipment
C. The only LBOs that are taken public are those that have been the most successful
D. LBOs experience improved decision making during the post-buyout period
E. None of the above
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LBO investors must be very careful not to overpay for a target firm because
A. Major competitors tend to become more aggressive when a firm takes on large amounts of debt
B. High leverage increases the break-even point of the firm
C. Projected cash flows are often subject to significant error limiting the ability of the firm to repay its debt
D. A and B only
E. A, B, and C
Fraudulent conveyance is best described by which of the following situations:
A new company spun off by its parent to the parent's shareholders that enters bankruptcy is found to have been substantially undercapitalized when created
B. An acquiring company pays too high a price for a target firm
C. A company takes on too much debt
D. A leveraged buyout is taken public when its operating cash flows are increasing
E. None of the above
Which of the following are commonly used sources of funding for leveraged buyouts?
A. a. Secured debt
B. Unsecured debt
C. Preferred stock
D. Seller financing
E. All of the above
Which of the following is generally not considered a characteristic of a financial buyer?
A. Focus on short-to-intermediate returns
B. Concentrate on actions that enhance the ability of target firm’s ability to generate cash flow to satisfy debt service requirements
C. Intend to own the business for very long periods of time
D. Manage the business to maximize return to equity investors
E. All of the above
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