Which of the following statements about leveraged buyout firms (LBOs)is true?
A)Because an LBO owns a portfolio of many different companies, it is very well-diversified and, therefore, has a very low cost of capital.
B)LBOs typically use the assets of all their various companies to collateralize debt needed to finance additional acquisitions.
C)LBOs follow the pecking order religiously when they finance their acquisitions.
D)None of the above is a true statement.

Question

Quizplus · Accepted Answer

None of the statements are true.

Explanation for each option:
A) This statement is false as LBOs typically focus on acquiring one company at a time rather than owning a portfolio of diverse companies. 
B) While LBOs may use the assets of a target company to collateralize debt, they typically do not use the assets of all their various companies. 
C) LBOs may follow the pecking order to some extent, but they are more likely to use a combination of debt and equity to finance their acquisitions. A) This statement is false. LBOs typically own a concentrated portfolio of companies, rather than a diversified one. As a result, they are more exposed to industry-specific risks and have a higher cost of capital.
B) This statement is partially true. LBOs do use the assets of their portfolio companies to secure debt financing for new acquisitions. This is known as cross-collateralization. However, it is not accurate to say that LBOs use all their assets as collateral, as some portfolio companies may be excluded due to their strategic value or other factors.
C) This statement is false. LBOs do not always follow the pecking order when financing their acquisitions. The pecking order suggests that firms should use internal funds first, followed by debt, and then equity as a last resort. However, LBOs often rely heavily on debt financing, even if they have ample internal funds or could issue equity. This is because debt financing can provide tax benefits and enhance returns for the LBO's investors.

Which of the Following Statements About Leveraged Buyout Firms (LBOs)is