Question

Small groups of investors led by managers inside the firm who believe their firms is undervalued in the marketplace. The inside purchases have been carried out by the highly optimistic groups of investors, willing to borrow heavily in the belief that revenues can be raised higher than debt-service costs. This is called

(A) golden parachute;
(B) green mail;
(C) leverage buyout;
(D) poison pills;
(E) assets purchase.

Answer 1

The scenario refers to a leveraged buyout (LBO), where investors led by insiders acquire a company using borrowed funds with the intention of improving its financial performance and generating revenues to service the debt and obtain a profit.

Step-by-step explanation:

The scenario described in the question relates to a situation where investors, led by the company's managers, decide to buy the company because they believe it is undervalued in the marketplace. These investors are inclined to borrow heavily with the conviction that the firm can generate revenues higher than the costs needed to service the debt. This type of transaction is known as a (C) leverage buyout.

In a leveraged buyout (LBO), the investors use borrowed funds to acquire the company, with the assets of the company often serving as collateral for the loans. The strategy is to improve the company's financial performance or perhaps to sell parts of it at a profit, so that the investment pays off the debt over time and eventually yields a profit.