Rationale for Leveraged Buyout Strategy

Easy Private Equity Valuation Leveraged Buyouts

Consider a private equity firm that is planning a leveraged buyout (LBO) of a mid-sized manufacturing company. The private equity firm intends to finance the acquisition using a combination of equity and debt, with a target debt-to-equity ratio of 70:30. This strategy is designed to optimize the firm's capital structure and enhance return on equity (ROE) for investors.

In evaluating the target company for the LBO, the private equity firm focuses on its current cash flows, growth potential, and how the leverage will impact the company's financial stability post-acquisition.

What is the primary reason a private equity firm would employ a leveraged buyout strategy in this context?

To minimize the overall cost of capital by increasing debt financing.

To enhance the internal rate of return (IRR) by increasing the proportion of equity.

To take advantage of tax shields available from interest payments.

Hint

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