CFA Practice Question

There are 139 practice questions for this study session.

CFA Practice Question

Which is NOT a characteristic of a good LBO target?
A. Steady and predictable cash flow.
B. Little debt.
C. High capital expenditure requirements.
Explanation: A steady and predictable cash flow will ensure that the LBO target firm will be able to meet its interest payments for the debt it will take on. Steady and predictable cash flow makes it easier to get a loan since there is less risk that the firm will not be able to meet interest payments.

Little debt will mean few obligations to pay off other loans. This makes the deal less risky (lower leverage = less risk) and allows excess cash to go to the debt necessary for the leveraged buyout.

C is wrong. The less annual investment that is required to operate a business, the better. High CapEx is unwelcome, as it consumes cash that could otherwise go to paying interest payments, principal debt payments, or dividends to the equity holders.

User Contributed Comments 2

User Comment
sals1230 Great, detailed explanation, thank you. I wish that going forward, all or most question explanations will include a detailed why a certain answer is correct or incorrect.
PerP Agreed, sals1240
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