What is one advantage of LBO financing?

The advantage of LBO (Leveraged Buyout) financing highlighted by the choice regarding the equity portion being as low as 20-40% of the total purchase price is significant for several reasons.

In an LBO context, a firm uses a substantial amount of debt to finance the acquisition of a company, where the equity contribution from the investors is relatively small compared to the total deal value. This structure allows private equity firms to amplify their returns on equity; when the acquired company's cash flows cover the debt service and the operating performance improves, any increase in value is largely attributable to the equity investment, which remains a small fraction of the overall capital structure.

This ability to control a large asset with a relatively small amount of equity capital means that if the investment performs well, returns can be strikingly high for equity investors, as they would benefit from a greater share of the profits relative to their investment. It also facilitates more aggressive growth strategies, as the leverage can lead to enhanced returns, provided the underlying business performs adequately to meet debt obligations.

The other choices do not accurately depict advantages of LBO financing; they either mischaracterize the dynamics of leverage and risk in such transactions or present limitations that do not align with the standard benefits of LBO