Dynamics of Leveraged Buyouts

Medium Private Equity Valuation Leveraged Buyouts

ABC Capital is considering an investment in a privately held company, XYZ Corp, through a leveraged buyout (LBO). The firm projects that XYZ Corp will generate $10 million in EBITDA in the first year post-acquisition. ABC Capital expects to finance 70% of the purchase price through debt and the remaining 30% through equity. The deal structure includes a 5-year holding period, after which they anticipate selling XYZ Corp at an exit multiple of 7 times EBITDA. Given these assumptions, which of the following statements accurately reflects the dynamics of the LBO structure for ABC Capital?

The equity return will be negatively impacted if EBITDA grows at a rate lower than the cost of debt.

An increase in the exit multiple will have no impact on the internal rate of return (IRR) for equity holders.

The use of leverage amplifies the potential return on equity, especially if company performance exceeds expectations.

Hint

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