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Goldman Sachs Investment Banking Analyst Interview Question (student candidate)

I interviewed in New York, NY and was asked:
"How does an LBO work? Would you rather finance an acquisition with a debt/equity split of 70/30 or 90/10? Why?"
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An LBO occurs when an investor, typically a financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing).

Typically the debt portion of a LBO ranges from 50%-85% of the purchase price, but in some cases debt may represent upwards of 95% of purchase price. This is because the amount of debt used to finance a transaction varies according to the financial condition and history of the acquisition target, market conditions, the willingness of lenders to extend credit (both to the LBO's financial sponsors and the company to be acquired) as well as the interest costs and the ability of the company to cover those costs. Thus to use the LBO to their advantage higher the debt, better is the advantage.
- Snigdha Mehrotra on Apr 27, 2012 Flag Response

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