Mergers and Acquisitions Final Exam
Questions and Correct Answers
Leveraged Buyouts ✅A leveraged buyout (LBO) is the acquisition of a company,
division, business, or collection of assets ("target") using debt to finance a large portion
of the purchase price. The remaining portion of the purchase price is funded with an
equity contribution by a financial sponsor ("sponsor").
Financial Sponsor ✅A financial sponsor is a private equity investment firm, particularly
a private equity firm that engages in leveraged buyout transactions. They usually look
for a 20%+ annualized return and an exit period of five years.
Private Equity Firm ✅An investment management company that provides financial
backing and makes investments in the private equity of startup or operating companies
through a variety of loosely affiliated investment strategies including leveraged buyout,
venture capital, and growth capital. PE firms, hedge funds, and venture capital funds
raise the vast majority of their investment capital from third-party investors, which
include public and corporate pension funds, insurance companies, endowments and
foundations, sovereign wealth funds, and wealthy families/individuals.
Amount of debt ✅In a traditional leverage buy-out, debt as typically comprised 60% to
70% of the financing structure with equity comprising the remaining 30% to 40%.
Tax savings ✅The use of leverage provides the additional benefit of tax savings
realized due to the tax deductibility of interest expense.
Free cash flow ✅Free cash flow is the cash a company produces through its
operations, less the cost of expenditures on assets. In other words, free cash flow (FCF)
is the cash left over after a company pays for its operating expenses and capital
expenditures, also known as CAPEX. Used to service periodic interest payments and
reduce the principal amount of debt over the life of the investment.
Investment horizon ✅During the time from which the sponsor acquires the target until
its exit, cash flow is used primarily to service and repay the principal amount of debt,
thereby increasing the equity portion of the capital structure.
Debt used in leverage buyouts ✅The debt used in an LBO is raised through the
issuance of various types of loans, securities, and other instruments that are classified
based on their security status as well as their seniority in the capital structure. The
condition of the prevailing debt capital markets plays a key role in determining leverage
levels, as well as the cost of financing and key terms. The equity portion of the financing
structure is usually sourced from a pool of capital ("fund") managed by the sponsor.
Questions and Correct Answers
Leveraged Buyouts ✅A leveraged buyout (LBO) is the acquisition of a company,
division, business, or collection of assets ("target") using debt to finance a large portion
of the purchase price. The remaining portion of the purchase price is funded with an
equity contribution by a financial sponsor ("sponsor").
Financial Sponsor ✅A financial sponsor is a private equity investment firm, particularly
a private equity firm that engages in leveraged buyout transactions. They usually look
for a 20%+ annualized return and an exit period of five years.
Private Equity Firm ✅An investment management company that provides financial
backing and makes investments in the private equity of startup or operating companies
through a variety of loosely affiliated investment strategies including leveraged buyout,
venture capital, and growth capital. PE firms, hedge funds, and venture capital funds
raise the vast majority of their investment capital from third-party investors, which
include public and corporate pension funds, insurance companies, endowments and
foundations, sovereign wealth funds, and wealthy families/individuals.
Amount of debt ✅In a traditional leverage buy-out, debt as typically comprised 60% to
70% of the financing structure with equity comprising the remaining 30% to 40%.
Tax savings ✅The use of leverage provides the additional benefit of tax savings
realized due to the tax deductibility of interest expense.
Free cash flow ✅Free cash flow is the cash a company produces through its
operations, less the cost of expenditures on assets. In other words, free cash flow (FCF)
is the cash left over after a company pays for its operating expenses and capital
expenditures, also known as CAPEX. Used to service periodic interest payments and
reduce the principal amount of debt over the life of the investment.
Investment horizon ✅During the time from which the sponsor acquires the target until
its exit, cash flow is used primarily to service and repay the principal amount of debt,
thereby increasing the equity portion of the capital structure.
Debt used in leverage buyouts ✅The debt used in an LBO is raised through the
issuance of various types of loans, securities, and other instruments that are classified
based on their security status as well as their seniority in the capital structure. The
condition of the prevailing debt capital markets plays a key role in determining leverage
levels, as well as the cost of financing and key terms. The equity portion of the financing
structure is usually sourced from a pool of capital ("fund") managed by the sponsor.
