Which of the following steps is NOT part of the LBO process?

• A. Making assumptions about financial variables
• B. Creating a source and uses section
• C. Projecting company's ratio of return on equity
• D. Adjusting the company's balance sheet

Answer: (C)

In the context of a leveraged buyout (LBO) process, projecting the company's ratio of return on equity is not typically a key step. While understanding return on equity is important for evaluating a company's financial performance, it is not a primary focus during the LBO process itself. Instead, the LBO process revolves around understanding how much debt can be serviced, how the capital structure will be arranged, and predictions regarding cash flow generation to meet debt obligations, rather than focusing specifically on return on equity.

The process includes making assumptions about financial variables like revenue growth rates and operating costs, which directly impact cash flow and debt repayment capabilities. It also involves creating a sources and uses section, which outlines where the funds for the purchase will come from and how they will be utilized. Additionally, adjusting the balance sheet is crucial as it reflects the new capital structure post-transaction and shows the levels of debt used to finance the acquisition. These actions are integral to setting up the leveraged buyout strategy effectively, whereas projecting return on equity, while informative, is not a direct step in executing an LBO.