Reading Comprehension

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

Tough choice between C and D, but I'll go with C since the KKR case study is an "application". OA?

Yups, I eliminated all but C and D too.

MGMAT test review says C. But I disagree.

D is more convincing to me b'cos the passage is about certain specific period "early to mid 80s" and in last para they say "The 1980s were the heyday of the leveraged buyout" I would call that popular.

whereas for C, wouldn't evolution pertain to what something was and what it is now...evolution is about change; in this case it should have been change in the that financial device. Do we see any such change mentioned in the passage? Anything saying how it was practiced in past and how it is practiced now?

Anyone with a convincing explanation?

Here's what I think they mean by evolution.

It details how they became popular and then the reasons why this practice failed.

D explains why they're popular. But it completely ignores half of the passage that talks about why they lost popularity.

student22 wrote:Here's what I think they mean by evolution.

It details how they became popular and then the reasons why this practice failed.

D explains why they're popular. But it completely ignores half of the passage that talks about why they lost popularity.

you have a valid point there but am still not 100% convinced.

The way we can eliminate D for one point that it ignores how LBOs lost popularity.
Same way we can eliminate C b'cos passage only talks about how LBOs gained prominence and lost popularity in 1980s and so by agreeing with C we are generalizing something that is specific. This is more so b'cos one of the options (D) corrects this by stating "during a certain time period"

student22 wrote:Tough choice between C and D, but I'll go with C since the KKR case study is an "application". OA?

I will rule out C. Coz "evolution" should mean that the financial device got changed in some way to become better or in short evolved. This is not the case over here as LBO has not evolved its only that the lending institutions and other players had come to know about the risks associated with it.

IMO D

A- criticize the motives of those who use risky financial strategies - author doesn't target anyone here
B- challenge a common perception of financiers - not true
C- describe the evolution and application of a certain financial device - the financial device is leveraged buyout - evolution is described as how it changed from no collateralized to the opposite because of the high risk involved and application is explained in examples
D- explain the popularity of leveraged buyouts during a certain period - author is not concerned with popularity alone
E- argue that leveraged buyouts are detrimental to overall financial health - it is risky but not detrimental

so C comes out as answer