2012 CFAI Mock AM - #27

The question is “when company is sold which part of capital structure will be decreased” - I understand that debt reduction is generically a source of value creation but wouldn’t the increased purchase price suggest that higher debt could be supported?

Totally agree.

Also, it specifically says that Shoshone is sold to another Private Equity firm. My reasoning in answering this question was that another private equity firm would be likely to keep the high degree of leverage.

I also had an issue with question 28 in this vignette. It says that the firm focuses on buyouts of publically traded companies. Doesn’t this mean that IPO as an exit route is not possible, as the company would have already traded publically in the past?

I think the question was specific to the company which was sold for a higher value which implied that it was operating well & had serviced its debt over years that is why the capital structure altered and the debt part decreased. I answered it thinking in this way.