Which of the Following Is Incorrect with Respect to Leverage

question 38

Multiple Choice

Which of the following is incorrect with respect to leverage buyouts (LBOs) ?

• A) They originated in the 1960s and were originally known as bootstrap transactions which reflected the general consensus that the firm was, more or less, paying for its own acquisition.
• B) The typical LBO uses a ratio of 70% debt to 30% equity but levels of debt can reach much higher.
• C) LBOs are an extreme example of releveraging because debt is used to buy out the majority of the equityholders to gain control of the firm.
• D) None of these statements is incorrect.

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Definitions:

Cash Dividends

Shareholder payouts from a corporation, usually sourced from the company's profits.

Insignificant Influence

A situation where an investor does not have a significant or controlling impact on the management or decision-making of an investee.

Insignificant Influence

A situation in which an investor does not have the power to govern the financial and operating policies of an investee.

Stock Investment

Purchasing shares of a company's stock to potentially earn dividends or sell at a higher price for profit, considered a form of investing.