Which model assumes the acquisition of a company with a significant amount of borrowed funds?

• A. DCF
• B. LBO
• C. Public comps
• D. Acquisition comps

Answer: (B)

The leveraged buyout model is built around financing the acquisition with a large amount of debt relative to equity. In an LBO, a sponsor uses borrowed funds—often secured by the target’s assets and cash flows—to finance most of the purchase price. The model then tracks a debt schedule, interest costs, principal repayments, and covenants, showing how the target’s cash flows are used to pay down debt over time. Returns for the sponsors come from the combination of debt repayment (which boosts equity value as leverage is reduced) and the exit, rather than from operating improvements alone.

This contrasts with a standard DCF, which focuses on the company’s cash flows and uses a discount rate to determine value largely independent of the financing mix. Relative valuations like public comps or acquisition comps pull values from peers’ multiples and don’t model how a deal is funded, so they don’t capture the leverage dynamics and debt paydown central to an LBO.