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Questions and Answers
What is one of the typical measures of performance used to evaluate LBO transactions?
What is one of the typical measures of performance used to evaluate LBO transactions?
- Free cash flow yield
- Operating profit margin (correct)
- Net income
- Debt-to-equity ratio
In an LBO transaction, what is the purpose of using high levels of debt by financial sponsors?
In an LBO transaction, what is the purpose of using high levels of debt by financial sponsors?
- To comply with a legal requirement for maximum equity financing
- To ensure full financing by the financial sponsor
- To decrease financial risk for the target company (correct)
- To decrease returns for the financial sponsors
Why do financial sponsors typically seek at least a 20% annualized return for LBO transactions?
Why do financial sponsors typically seek at least a 20% annualized return for LBO transactions?
- To decrease their overall risk exposure
- To maximize tax benefits from the transaction
- To compensate for the illiquidity and riskiness of such investments (correct)
- To match the industry average returns
What does the Money multiple measure in an LBO transaction?
What does the Money multiple measure in an LBO transaction?
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Which option best describes a key characteristic of a good candidate for an LBO?
Which option best describes a key characteristic of a good candidate for an LBO?
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What is the main reason financial sponsors use leverage in LBO transactions?
What is the main reason financial sponsors use leverage in LBO transactions?
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