Which of the Following Statements About Leveraged Buyout Firms (LBOs)is

question 33

Multiple Choice

Which of the following statements about leveraged buyout firms (LBOs) is true?

• A)Because an LBO owns a portfolio of many different companies, it is very well-diversified and, therefore, has a very low cost of capital.
• B)LBOs typically use the assets of all their various companies to collateralize debt needed to finance additional acquisitions.
• C)LBOs follow the pecking order religiously when they finance their acquisitions.
• D)None of the above is a true statement.

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Definitions:

Incremental Income

The additional income generated from undertaking a specific action or investment, compared to not doing so.

Variable Costs

Expenses that change in proportion to the level of production or sales activity, such as raw materials and direct labor costs.

Fixed Costs

Costs that do not change with the level of production or sales activities, such as rent, salaries, and insurance premiums.

Variable Manufacturing Overhead

Costs that vary with production volume, such as utilities and materials, which are only incurred as a result of manufacturing activities.