In financial terms, what is a leveraged buyout (LBO)?

A leveraged buyout (LBO) is characterized by a purchase primarily financed with borrowed funds, meaning that the buyer uses a significant amount of debt to acquire a company, while using the company's assets as collateral. This strategy allows investors or private equity firms to maximize their potential return on investment by limiting the amount of equity they need to contribute upfront.

In an LBO, the expectation is that the acquired company's cash flow will be sufficient to service the debt used for the acquisition. After the purchase, the goal is often to improve the company’s operations, cut costs, or grow its revenue to eventually sell it at a profit. Because a large part of the purchase price is funded through debt, this approach significantly amplifies returns—though it also increases risk.

The other response choices do not accurately describe an LBO. For instance, a purchase made entirely with cash does not involve leverage, while stock options pertain to employee compensation rather than acquisition financing. Additionally, a purchase of a publicly traded company can be done through various means and does not specifically define the nature of leveraging debt.