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LOS d: Interpret the components of performance from a leveraged buyout.
Q1. Which of the following statements is the least appropriate?
A) Leverage in a leveraged buyout investment can be advantageous as debt amortization can magnify investor returns.
B) Debt amortization in a leveraged buyout investment increases risk to the investor as it is a burden on the firm’s cash flow.
C) Leverage in a leveraged buyout investment can be disadvantageous as debt increases risk to the investor if the firm cannot meet its interest obligation.
Q2. Which of the following statements most accurately describes the components of returns on a leveraged buyout (LBO) investment:
A) The return on common shares, the increase in the price multiple on exit, and the equity held by management.
B) The return on preference shares, the increase in the price multiple on exit, and the reduction in debt claims.
C) The interest earned on debt financing, the return on common shares and the return on preference shares.
Q3. A private equity firm is guaranteed to receive 80% of the residual value of a leveraged buyout investment, with the remaining 20% owing to management. The initial investment is $500 million, and the deal is financed with 70% debt and 30% equity. The projected multiple is 2.0. The equity component consists of:
- $120 million preference shares.
- $25 million private equity firm equity.
- $5 million management equity.
At exit in 5 years the value of debt is $150 million and the value of preference shares is $300 million. The payoff multiple for the private equity firm and for management, respectively, is closest to:
Private equity Management
A) 5.10 22.0
B) 3.03 11.0
C) 6.34 46.0 | 
发表于 2009-3-10 11:15
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