In a leveraged buyout, a purchasing firm uses the assets of the firm i

QUESTION

In a leveraged buyout, a purchasing firm uses the assets of the firm it is acquiring as security for the loan being used to finance the purchase. What could happen after a leveraged buyout if the purchased company performed poorly?

A) The security for the loan would be affected, and the acquiring company could face serious financial trouble.
B) The security for the loan would be affected because the purchased company no longer exists.
C) The security for the loan would be affected because the acquiring company no longer exists.
D) The security for the loan would not be affected because the purchased company and the acquiring company are now one and the same.
E) The security for the loan would not be affected because the acquiring company could pay off the loan with other monies.

ANSWER

Answer: A
Explanation: A) A leveraged buyout requires that the value of the company being purchased be used toward the purchase price. If the company being purchased does not do well, this means that the purchasing firm will not have the resources needed to pay off the purchase.