Leveraged Buyout Financing

D

Leveraged buyout (LBO) financing refers to a financial strategy where a company's management, often in collaboration with a private equity firm, acquires a controlling interest in the company using a significant amount of borrowed funds. The purpose of an LBO is typically to take a public firm private, which means the correct answer to this question is option D: take a public firm private.

Let's discuss each answer choice to provide a detailed explanation:

A. Taking a private firm public: This process is known as an initial public offering (IPO), where a private company offers its shares to the public for the first time. Leveraged buyout financing is not used to take a private firm public. Instead, investment banks and underwriters are involved in facilitating the IPO process.

B. Buying additional product lines: While an LBO may involve strategic decisions to enhance the acquired company's operations, such as expanding product lines, this is not the primary purpose of LBO financing. LBOs primarily focus on acquiring a controlling interest in a company, often with the intent to restructure and improve its operations.

C. Developing new lines to revitalize the firm: Similar to the previous answer choice, revitalizing a firm through the development of new product lines may be a part of the overall strategy following an LBO. However, LBO financing itself is not specifically used for developing new lines. It is primarily utilized for the acquisition of a controlling interest in the target company.

D. Taking a public firm private: This is the correct answer. Leveraged buyout financing is commonly employed by management and private equity firms to acquire a controlling interest in a publicly traded company. By using borrowed funds, they purchase the outstanding shares of the company and take it private. Taking a company private often involves restructuring, improving efficiency, and implementing operational changes away from the scrutiny and short-term focus of public markets.

In summary, leveraged buyout financing is primarily used by management and private equity firms to take a public firm private, making option D the correct answer.