Quantify the impact of cashflow and debt’s amplification of equity gains (and losses) in levered investments.
Module Category: Capital Structure Drivers
Key Concept: In LBOs, changes in company equity ratios (ERs) are driven by debt in the capital structure and changes in those debt levels. This allows analysts to break the Leverage Effect (see Module 03) into Gearing and Cashflow Generation. Debt amplifies equity gains in successful investments and amplifies equity losses in unsuccessful investments.