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ACCA Strategic Professional · Advanced Financial Management · Business re-organisation

A private equity house is considering a leveraged buy-out of a listed company. Which of the following is the typical characteristic of an LBO structure?

A leveraged buy-out is funded mainly by debt, which is secured on the target's assets and repaid from its future cash flows, with only a small equity contribution. This high gearing distinguishes it from share-exchange or equity-funded acquisitions.

  1. AAcquisition funded mainly by debt, with the target's assets and cash flows used to service and secure that debtCorrect
  2. BAcquisition funded mainly by a new issue of ordinary shares to existing shareholders
  3. CAcquisition paid for entirely by exchanging shares of the bidder for shares of the target
  4. DAcquisition funded mainly by the target's existing retained earnings with no new borrowing

Explanation

An LBO uses a high proportion of debt finance, secured on the target's assets and serviced from its cash flows, with a small equity layer from the sponsor and management. The share-exchange and equity-funded options describe conventional acquisitions with low gearing.

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