A private equity firm is considering an acquisition of a manufacturing company via a leveraged buyout (LBO). In an LBO, the firm uses a significant amount of debt to finance the purchase of the company, with the expectation that the returns on investment will exceed the cost of that debt.
The private equity firm believes that after the acquisition, they will be able to improve the operational efficiency of the company and increase its cash flow. This strategy is a common feature of LBOs.
Given this context, which of the following statements is true regarding the primary valuation method commonly used in leveraged buyouts?