Chapter 20

Question 1

Leveraged buyout

Answer 1

when an acquisition is financed primarily by using acquired firm’s assets as collateral.

• debt normally carried on acquired firm’s BS
• serviced by its operating cash flows
• increased liquidity risk

Question 2

trade-off capital structure theory

Answer 2

idea that mgmt. uses a proper mix of of debt and equity in their capital structures, to achieve lowest possible WACC (“optimal capital structure”)