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CA Final · Advanced Financial Management · Mergers, Acquisitions and Corporate Restructuring

Which statement best describes a leveraged buyout (LBO) as studied in corporate restructuring?

A leveraged buyout is an acquisition funded mostly by borrowing, where the target's own assets and future cash flows back the debt and repay it. It differs from a share-swap deal, which uses equity rather than heavy debt financing.

  1. AAcquisition of a company financed largely by borrowed funds, with the target's assets and cash flows serving as security and repayment sourceCorrect
  2. BAcquisition financed entirely by issuing fresh equity shares of the acquirer to the target's shareholders
  3. CMerger of two companies in which the target's shareholders receive only preference shares
  4. DSale of a subsidiary's shares to the public without any change in control

Explanation

An LBO uses a high proportion of debt to buy a company, and the acquired firm's assets and future cash flows secure and service that debt. An all-equity share-swap acquisition is the opposite of leverage, so that option is wrong.

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