A Leveraged Buyout (LBO) involves which of the following?

A Leveraged Buyout (LBO) is characterized primarily by the use of borrowed funds to finance the acquisition of a company. In an LBO, the acquiring firm or individual typically uses a significant amount of debt to cover the purchase price, with the acquired company's assets and future cash flows often used as collateral for the loans. This structure allows the buyer to leverage their equity investment, meaning that a smaller amount of their own capital is needed to complete the acquisition, while the rest is financed through debt.

The rationale behind using borrowed money in an LBO is to amplify potential returns. Since the buyer is using leverage, if the investment performs well, the returns on the equity invested can be substantially higher than if the acquisition had been made purely with cash. This is why financing through debt is a central theme in LBOs, distinguishing them from other types of corporate buyouts or acquisitions that might use cash or stock issuance instead.

Other methods, such as issuing new stock or purchasing assets without loans, do not represent the leveraged component necessary in LBOs. The use of cash without borrowing does not achieve the leverage effect, and thus does not qualify as an LBO.