What does the term 'leverage buyout' usually refer to?

What does the term 'leverage buyout' usually refer to?

• A. Acquisition of another company using a significant amount of borrowed funds
• B. Purchasing assets with cash reserves
• C. Buying back shares from investors
• D. Investing in new stock issues

Answer: (A)

The term 'leverage buyout' specifically refers to the acquisition of another company using a significant amount of borrowed funds, often in combination with a relatively small amount of the buyer's own equity. This financing structure allows investors to use the assets of the target company as collateral for the debt, essentially enabling them to amplify their purchasing power. The goal of a leverage buyout is to generate high returns on equity, as the debt typically constitutes a large portion of the capital used to complete the acquisition. This strategy is prevalent in private equity, where firms seek to acquire companies, enhance their operations, and eventually sell them at a profit, often within a specific time frame. The use of borrowed funds enhances the potential return on investment if the acquired company performs well financially, as the buyer is investing less of their own capital upfront. Options suggesting cash purchases, share buybacks, or investing in new stock issues don't align with the fundamental nature of leverage buyouts, which distinctly involve the use of debt to finance acquisitions.

The term 'leverage buyout' specifically refers to the acquisition of another company using a significant amount of borrowed funds, often in combination with a relatively small amount of the buyer's own equity. This financing structure allows investors to use the assets of the target company as collateral for the debt, essentially enabling them to amplify their purchasing power. The goal of a leverage buyout is to generate high returns on equity, as the debt typically constitutes a large portion of the capital used to complete the acquisition.

This strategy is prevalent in private equity, where firms seek to acquire companies, enhance their operations, and eventually sell them at a profit, often within a specific time frame. The use of borrowed funds enhances the potential return on investment if the acquired company performs well financially, as the buyer is investing less of their own capital upfront.

Options suggesting cash purchases, share buybacks, or investing in new stock issues don't align with the fundamental nature of leverage buyouts, which distinctly involve the use of debt to finance acquisitions.