If the WACC Is Used in Valuing a Leveraged Buyout

question 6

Multiple Choice

If the WACC is used in valuing a leveraged buyout, the:

• A)WACC remains constant because of the final target debt ratio desired.
• B)flotation costs must be added to the total UCF.
• C)WACC must be recalculated as the debt is repaid and the cost of capital changes.
• D)tax shields of debt are not available because the corporation is no longer publicly traded.
• E)None of the above.

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Definitions:

Contribution Margin

The contribution margin represents the portion of sales revenue that is not consumed by variable costs and contributes to covering the company's fixed costs.

Depreciation Expense

A technique in accounting for distributing the expense of a physical asset across its usable life.

Fixed Costs

Expenses that do not change with the level of activity or output over a short period, such as rent, salaries, and insurance premiums.

Operating Leverage

A measure that evaluates the extent to which a firm can increase its profits by increasing sales, highlighting the fixed versus variable costs in operations.