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Reading 48: Private Equity Valuation- LOS o~ Q1-3

 

LOS o: Explain the role of cash sweep in an LBO transaction.

Q1. A cash sweep in an LBO transaction is the:

A)   excess cash used to pay down debt.

B)   excess profit paid out to the general partner.

C)   excess profit paid out to the limited partners.

 

Q2. Which of the following correctly identifies how an increase in the cash sweep affects the cash balance in an LBO and how it affects equityholders’ claim on the LBO investment’s assets, respectively?

               Cash balance          Equityholders’ claim on assets

 

A)       No effect                         Increases

B)      Decreases                        Increases

C)       No effect                         No effect

 

Q3. If the cash balance in an LBO is set constant by contract, and the LBO pays out all of its net income in dividends, how does a cash sweep affect equityholders’ claim on assets? Equity holders’ claim on assets:

A)   remains unchanged.

B)   decreases.

C)   increases.

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