One of the Justifications for Leveraged Buyouts in the 1980s

question 59

Multiple Choice

One of the justifications for leveraged buyouts in the 1980s was that they introduced the "discipline of debt." This refers to the fact that

• A) "plowback" is a costly form of raising funds.
• B) interest payments have priority over dividend payments.
• C) double taxation of income raises the attraction of borrowing.
• D) government debt forces firms to borrow more as well.

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Definitions:

Cost of Debt

The effective rate that a company pays on its total debt, reflecting the expense of borrowing funds.

WACC

Weighted Average Cost of Capital; a calculation of a firm's cost of capital where each category of capital is proportionately weighted, including equity, debt, preferred stock, and any other long-term debt.

Debt Financed

The use of borrowed funds to purchase assets or fund operations, typically involving interest payments to the lender.

Tax Rate

The percentage at which an individual or corporation is taxed by the government.