easy · Principles of Finance Capital Budgeting
A financial sponsor is evaluating a Leveraged Buyout (LBO) of a manufacturing firm.
The primary mechanism through which the sponsor expects to generate a high internal rate of return (IRR), even if the company's enterprise value does not grow, is:
- Minimizing the interest expense through a 100% equity capital structure.
- Deleveraging, where debt is paid down using the firm's operating cash flow.
- Multiple expansion, where the firm is sold at a higher P/E ratio than it was bought.
- Increasing the company's cash balance through new equity issuances.
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