Question

​Greystone Group is looking to purchase Heartland Hotels, Inc. Greystone plans to use $5 million in cash and finance $20 million in order to complete the purchase. Greystone is confident they can turn Heartland’s business around and repay the $20 million from profits earned from the hotel. This is an example of a

Answer 1

Answer:

Leverage buyout

Explanation:

Leverage buyout refers to the acquisition of another company using debt as the main source of financing the deal. The acquiring company borrows from various sources and will often use the assets of the acquired company as collateral. In leverage buyout, the acquiring entity borrows up to 80 percent or more and finances the balance with its equity.

The use of debt enhances the rate of return of the acquiring firm. Greystone Group is using 5 million of its funds and borrowing 20 million. The debts represent 80 percent of the cost of acquisition. The acquiring entity can achieve a higher rate of return by using as little of its funds as possible.