What Is the Resulting Capital Structure After an LBO If

question 132

Multiple Choice

What is the resulting capital structure after an LBO if prior to the deal the firm had $225M in equity and $10M in debt, and the acquiring group bought the company's stock at book value contributing $20M of its own money and borrowing the rest?

• A)Debt $10M; Equity $215M
• B)Debt $215M; Equity $10M
• C)Debt $215M; Equity $20M
• D)Debt $225M; Equity $10M

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Definitions:

Break-Even Point

The point at which total costs and total revenue are equal, meaning no net loss or gain is incurred.

Variable Manufacturing Costs

Costs that fluctuate with the amount of production output, including expenses like raw materials, direct labor, and other costs that change with production volume.

Fixed Overhead

Costs that do not change with the level of production or sales, including expenses such as rent, salaries, and insurance, which are incurred regardless of business activity levels.

Contribution Margin Ratio

The percentage of sales revenue that exceeds variable costs, indicating the portion contributing to fixed costs and profit.