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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Meera Foods Ltd (equity Rs 40 crore) is considering a leveraged buyout of a division funded 80% by debt. The division generates stable free cash flows. Which feature of an LBO is most consistent with this case?

In a leveraged buyout, the heavy acquisition debt is serviced and secured by the acquired business's own cash flows and assets. This fits the case where 80% of the division purchase is debt-funded and the division yields stable free cash flows.

  1. ADebt is serviced from the acquired division's own cash flows and assetsCorrect
  2. BThe buyer funds the purchase entirely with new equity
  3. CDebt is repaid by issuing bonus shares to existing holders
  4. DThe acquired entity is merged immediately into the lender

Explanation

In an LBO, acquisition is financed mainly by borrowing, with the target's cash flows and assets servicing and securing the debt. The other options contradict the 80% debt funding or describe unrelated actions.

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