hard · Private Equity & LBOs
A sponsor acquires a company with a 'Locked Box' mechanism as of December 31. The deal closes on June 30. During the gap, the company earns $20M in profit and pays $5M in dividends to the seller.
Which of the following is true regarding the purchase price at closing?
- The purchase price remains unchanged because dividends are permitted pre-closing.
- The purchase price is adjusted based on a working capital peg at closing.
- The purchase price is reduced by $5M as 'leakage'.
- The purchase price is increased by $20M to reflect retained earnings.
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