Motivation Behind Leverage in LBOs

Very Easy Private Equity Valuation Leveraged Buyouts

In a leveraged buyout (LBO), the acquiring firm uses a significant amount of debt to finance the purchase of a company. This strategy allows the acquirer to use the cash flows generated by the target company to repay the debt. Which of the following best describes the primary motivation behind the use of leverage in an LBO?

To increase the total equity investment without affecting ownership.

To maximize the potential return on equity investment.

To reduce operational risks associated with the target company.

Hint

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