Here are some guidelines for spotting potential LBO candidates, EXCEPT FOR:

A. Low leverage.
B. High P/E multiple.
C. High, stable free cash flow.

Correct Answer: B

A: To extract maximum benefits, a private equity firm wants to replace expensive equity with cheaper debt.

B is wrong: A big part of the PE firms exit strategy is to sell the firm in 5 years at a higher P/E multiple than it bought it for.

C: Stable cash flows give lenders greater confidence in getting paid back, which increases the amount they're willing to lend.