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# In the early to mid-1980s, a business practice known as a

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In the early to mid-1980s, a business practice known as a [#permalink]

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13 May 2008, 22:15
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In the early to mid-1980s, a business practice known as a "leveraged buyout" became popular as a method for companies to expand without having to spend any of their own assets. The leveraged buyout was not without its problems, however, and in time it came to represent in the public imagination not only corporate ingenuity and success, but also excess and greed. Many of the main corporate figures of the 1980s saw spectacular rises and, perhaps inevitably, spectacular falls as they abused the leveraged buyout as a means to extraordinary financial gain.

A leveraged buyout entails one company purchasing another using the assets of the purchased company as the collateral to secure the funds needed to buy that company. The leveraged buyout allows companies to take on debt that their own assets would have been insufficient to secure in order to finance expansion. The benefit of the leveraged buyout is obvious: companies with insufficient funds can still expand to compete with larger competitors. The drawbacks, however, became apparent only after the fact: the purchased company must perform extraordinarily well in order to generate the capital to pay off the loans that made the purchase possible in the first place. When the purchased company underperforms, the buyer must somehow find the money to pay off the loans. If such funds are not obtained, the buyer may be forced to sell off the company, or parts thereof, for less than the purchase price. In these cases, the buyer is still responsible for repaying the debt that is not covered by the sale price. Many of these deals resulted in the evisceration of the purchased companies, as subparts were sold to pay down the loans and employees were laid off to reduce costs and increase profits.

The most famous leveraged buyout is probably the 1988 purchase of RJR Nabisco by Kohlberg Kravis Roberts ("KKR"). The purchase price for the corporate giant RJR Nabisco was \$25 billion, almost all of which was borrowed money. The takeover was "hostile," meaning that RJR Nabisco resisted any overtures from potential buyers. KKR ultimately succeeded by buying a controlling interest in RJR Nabisco, thereby obtaining voting control over the company. By the mid-1990s, though, KKR had seen a reversal of fortune and was forced to sell off RJR Nabisco in order to relieve itself of the crushing debt load.

The 1980s were the heyday of the leveraged buyout, as lending institutions were willing to loan money for these ventures. When the deals turned out to be much riskier in life than on paper, the lenders turned away from the buyouts and returned to the notion that borrowers must possess adequate collateral of their own.

1. The primary purpose of the passage is to

(A) criticize the motives of those who use risky financial strategies

(B) challenge a common perception of financiers

(C) describe the evolution and application of a certain financial device

(D) explain the popularity of leveraged buyouts during a certain period

(E) argue that leveraged buyouts are detrimental to overall financial health

2. The author mentions the RJR Nabisco case most probably in order to emphasize which of the following points?

A. Many lending institutions are no longer willing to support leveraged buyouts.

B. Leveraged buyouts can be successfully utilized to purchase large companies.

C. Leveraged buyouts are generally less successful in hostile takeovers than in non-hostile takeovers.

E. Kohlberg Kravis Roberts was a leader in the development of the leveraged buyout.

3. The passage provides support for which of the following statements?

A. Leveraged buyouts are utilized primarily by small companies.

B. Some companies purchased through leveraged buyouts fell short of their buyers' expectations.

C. Today, no banks or other lending institutions will finance leveraged buyouts.

E. Leveraged buyouts were responsible for much of the economic growth of the 1980s.

[Reveal] Spoiler: Question #1 OA
[Reveal] Spoiler: Question #2 OA
[Reveal] Spoiler: Question #3 OA

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Last edited by broall on 09 Jun 2017, 02:14, edited 1 time in total.

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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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13 May 2008, 23:05
terp06 wrote:
In the early to mid-1980s, a business practice known as a "leveraged buyout" became popular as a method for companies to expand without having to spend any of their own assets. The leveraged buyout was not without its problems, however, and in time it came to represent in the public imagination not only corporate ingenuity and success, but also excess and greed. Many of the main corporate figures of the 1980s saw spectacular rises and, perhaps inevitably, spectacular falls as they abused the leveraged buyout as a means to extraordinary financial gain.
A leveraged buyout entails one company purchasing another using the assets of the purchased company as the collateral to secure the funds needed to buy that company. The leveraged buyout allows companies to take on debt that their own assets would have been insufficient to secure in order to finance expansion. The benefit of the leveraged buyout is obvious: companies with insufficient funds can still expand to compete with larger competitors. The drawbacks, however, became apparent only after the fact: the purchased company must perform extraordinarily well in order to generate the capital to pay off the loans that made the purchase possible in the first place. When the purchased company underperforms, the buyer must somehow find the money to pay off the loans. If such funds are not obtained, the buyer may be forced to sell off the company, or parts thereof, for less than the purchase price. In these cases, the buyer is still responsible for repaying the debt that is not covered by the sale price. Many of these deals resulted in the evisceration of the purchased companies, as subparts were sold to pay down the loans and employees were laid off to reduce costs and increase profits.
The most famous leveraged buyout is probably the 1988 purchase of RJR Nabisco by Kohlberg Kravis Roberts ("KKR"). The purchase price for the corporate giant RJR Nabisco was \$25 billion, almost all of which was borrowed money. The takeover was "hostile," meaning that RJR Nabisco resisted any overtures from potential buyers. KKR ultimately succeeded by buying a controlling interest in RJR Nabisco, thereby obtaining voting control over the company. By the mid-1990s, though, KKR had seen a reversal of fortune and was forced to sell off RJR Nabisco in order to relieve itself of the crushing debt load.

The 1980s were the heyday of the leveraged buyout, as lending institutions were willing to loan money for these ventures. When the deals turned out to be much riskier in life than on paper, the lenders turned away from the buyouts and returned to the notion that borrowers must possess adequate collateral of their own.

----------------------------------------------------------------

The primary purpose of the passage is to
(A) criticize the motives of those who use risky financial strategies
(B) challenge a common perception of financiers
(C) describe the evolution and application of a certain financial device
(D) explain the popularity of leveraged buyouts during a certain period
(E) argue that leveraged buyouts are detrimental to overall financial health

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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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14 May 2008, 06:17
guys why is C wrong ?

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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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14 May 2008, 12:57
Anyone else wanna take a shot?
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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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14 May 2008, 13:23
I would say C.

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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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14 May 2008, 15:18
C

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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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14 May 2008, 15:24
OA is C
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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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14 May 2008, 16:03
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The primary purpose of the passage is to
(A) criticize the motives of those who use risky financial strategies - The author is not criticizing. Hence, ruled out.
(B) challenge a common perception of financiers. She is just describing, not challenging. Hence, ruled out.
(C) describe the evolution and application of a certain financial device. This is the answer. She describes when the leverage evolved and how it is applied. The word certain adds more strength here.
(D) explain the popularity of leveraged buyouts during a certain period. This is a very good tricky answer. I may chose this other times. The author never says about the popularity of leveraged buyouts. He never says why so many people chose this and how others were attracted. Instead, he says how few companies were doomed because of it.
(E) argue that leveraged buyouts are detrimental to overall financial health. Author never states this.

I saw the official answer before explaining.
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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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19 Jun 2011, 19:36
sondenso wrote:
terp06 wrote:
In the early to mid-1980s, a business practice known as a "leveraged buyout" became popular as a method for companies to expand without having to spend any of their own assets. The leveraged buyout was not without its problems, however, and in time it came to represent in the public imagination not only corporate ingenuity and success, but also excess and greed. Many of the main corporate figures of the 1980s saw spectacular rises and, perhaps inevitably, spectacular falls as they abused the leveraged buyout as a means to extraordinary financial gain.
A leveraged buyout entails one company purchasing another using the assets of the purchased company as the collateral to secure the funds needed to buy that company. The leveraged buyout allows companies to take on debt that their own assets would have been insufficient to secure in order to finance expansion. The benefit of the leveraged buyout is obvious: companies with insufficient funds can still expand to compete with larger competitors. The drawbacks, however, became apparent only after the fact: the purchased company must perform extraordinarily well in order to generate the capital to pay off the loans that made the purchase possible in the first place. When the purchased company underperforms, the buyer must somehow find the money to pay off the loans. If such funds are not obtained, the buyer may be forced to sell off the company, or parts thereof, for less than the purchase price. In these cases, the buyer is still responsible for repaying the debt that is not covered by the sale price. Many of these deals resulted in the evisceration of the purchased companies, as subparts were sold to pay down the loans and employees were laid off to reduce costs and increase profits.
The most famous leveraged buyout is probably the 1988 purchase of RJR Nabisco by Kohlberg Kravis Roberts ("KKR"). The purchase price for the corporate giant RJR Nabisco was \$25 billion, almost all of which was borrowed money. The takeover was "hostile," meaning that RJR Nabisco resisted any overtures from potential buyers. KKR ultimately succeeded by buying a controlling interest in RJR Nabisco, thereby obtaining voting control over the company. By the mid-1990s, though, KKR had seen a reversal of fortune and was forced to sell off RJR Nabisco in order to relieve itself of the crushing debt load.

The 1980s were the heyday of the leveraged buyout, as lending institutions were willing to loan money for these ventures. When the deals turned out to be much riskier in life than on paper, the lenders turned away from the buyouts and returned to the notion that borrowers must possess adequate collateral of their own.

----------------------------------------------------------------

The primary purpose of the passage is to
(A) criticize the motives of those who use risky financial strategies
(B) challenge a common perception of financiers
(C) describe the evolution and application of a certain financial device
(D) explain the popularity of leveraged buyouts during a certain period
(E) argue that leveraged buyouts are detrimental to overall financial health

Why is E wrong? The passage criticizes more than praises about LBO???

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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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28 Jun 2011, 18:42
I would say D. "explain the popularity of leveraged buyouts during a certain period" mainly because of the following two lines:

First line: In the early to mid-1980s, a business practice known as a "leveraged buyout" became popular as a method for companies to expand without having to spend any of their own assets.

Last paragraph: The 1980s were the heyday of the leveraged buyout, as lending institutions were willing to loan money for these ventures.

The reason I didn't go with C was because I didn't really see how the passage discussed the evolution of LB's as much as it described what they were within the period of the 1980's.

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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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31 Aug 2011, 23:06
1. The primary purpose of the passage is to
A criticize the motives of those who use risky financial
strategies
B challenge a common perception of financiers
C describe the evolution and application of a certain
financial device
D explain the popularity of leveraged buyouts during a
certain period
E argue that leveraged buyouts are detrimental to
overall financial health

EXPLANATION FOR C
JUSTIFICATION FOR WORD EVOLUTION - In the early to mid-1980s, a business practice known as a
“leveraged buyout” became popular as a method for
companies

JUSTIFICATION FOR WORD APPLICATION - The most famous leveraged buyout is probably the 1988
purchase of RJR Nabisco by Kohlberg Kravis Roberts
(“KKR”)

EXPLANATION FOR D
DOESN'T ONLY EXPLAIN POPULARITY BUT ALSO THE BENEFITS AND LOSSES AND ALSO LOSS OF POPULARITY IN LATE 1980s

EXPLANATION FOR E
leveraged buyouts are NOT ONLY detrimental BUT ALSO GOOD FOR FINANCIAL HEALTH (SUPPORT)Many of the main
corporate figures of the 1980s saw spectacular rises

SO THE BEST POSSIBLE ANSWER PROVIDED IS C
DO CORRECT ME IF I AM WRONG

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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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02 Sep 2011, 01:40
C.

The passage talks about how LB evolved as a method and how it was put into use in 1980s. The author not only discusses the popularity of the method, but also the drawbacks of the method since the opening paragraph of the passage.

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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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05 Nov 2013, 15:12
Where does it talk about them evolving, it just describes what they are and why they were popular. OA should be D on this one.

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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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19 Aug 2015, 13:30
how can they use the term financial device for a business practice known as a "leveraged buyout".
Can someone explain?
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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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20 Aug 2015, 22:55
Hi Mechmeera,

The usage of device is in the context of the question. Device as a tool or practice in the financial domain. Also, option C clearly sums the intent of the author in a more generic way (typical pattern of correct answer choice in GMAT RC primary purpose questions).
Hope it helps!
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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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20 Aug 2015, 23:12
Hi Mechmeera,

The usage of device is in the context of the question. Device as a tool or practice in the financial domain. Also, option C clearly sums the intent of the author in a more generic way (typical pattern of correct answer choice in GMAT RC primary purpose questions).
Hope it helps!

I agree with you that Option C sums the intent of the author in better way then others do.
But I just got confused when he used financial device term and i thought this is new word which did not exist in the passage.
What can we do in case of surprises like this in an RC passage?
How am I supposed to infer that financial device refers to business practice i.e., "leveraged buyout" in the exam.
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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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21 Aug 2015, 22:02
There are 2 things over here:

- In primary purpose questions - focus more on the overall context than on the individual words.

- One of the best strategies to solve primary purpose is to do Process Of Elimination. Do not think of the right answer but eliminate wrong answer. (Keep the paragraph summaries in mind to zero in to the passage summary)
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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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09 Jun 2017, 02:16
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Re: In the early to mid-1980s, a business practice known as a [#permalink]

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11 Jul 2017, 21:15
the passage is easy to read and understand. however, the question 1 and 2 contain close answers. we have to spend long time to differentiate the close answers to go to the oa.

we spend less time on reading passage and more time on answering questions.

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Re: In the early to mid-1980s, a business practice known as a   [#permalink] 11 Jul 2017, 21:15
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