What characterizes a leveraged buyout?

• A. Acquisition using mostly cash resources
• B. Acquisition of a company using borrowed money
• C. Merger between two equal companies
• D. Purchase of stock options in a company

Answer: (B)

A leveraged buyout (LBO) is characterized by the acquisition of a company using a significant amount of borrowed funds. In an LBO, the acquiring party usually uses the assets of the company being purchased as collateral for the debt that finances the acquisition. This approach allows the acquirer to take control of a company with a relatively small amount of equity capital, as the majority of the purchase price is funded through loans.

The structure of an LBO typically involves various layers of debt, including bank loans and high-yield bonds, which are utilized to finance the acquisition. The goal is often to improve the financial performance of the acquired company, enhance its value, and eventually realize a return on investment when the company is sold or taken public again. This practice can lead to increased returns for investors, but it also comes with significant risks, particularly related to the company's ability to generate sufficient cash flow to service the debt.

In contrast, the other choices present different concepts. While one option involves cash resources, it does not emphasize the borrowing aspect central to LBOs. The concept of a merger between equal companies pertains to corporate consolidation rather than the leveraged acquisition focusing on debt. Finally, the purchase of stock options relates to equity instruments and shareholder rights, which