Alternative Investments【Reading 46】Sample
The Austrian private equity firm RD primarily makes leveraged buyout investments as the firm’s management strongly believes that debt makes companies more efficient. The least likely explanation of management’s rationale is to: | B)
| reduce the interest tax shield. |
| C)
| increase firm efficiency. |
|
A PE firm’s debt is frequently securitized and repackaged as collateralized debt or loan obligations, resulting in a transfer of risk to the debt buyer. Greater use of debt also requires disciplined and timely payment of interest, causing a PE firm’s portfolio companies to use free cash flow efficiently. Higher leverage generally increases the tax savings from the use of debt (the interest tax shield) increasing firm value in the meantime. |