What are the advantages of using high leverage in an LBO?

Using high leverage in a leveraged buyout (LBO) primarily allows investors to achieve higher returns through reduced equity investment. When a financial sponsor uses debt to finance a significant portion of the purchase price, they can leverage their equity investment to gain a larger return on that equity.

By minimizing the amount of equity placed into the investment and using debt to cover a substantial portion of the acquisition cost, the financial returns on that smaller equity stake can be magnified. This occurs because, once the acquired company's operational cash flows start to exceed the interest payments on the debt, the equity holders experience a higher percentage of the profits relative to their initial investment.

High leverage can substantially enhance the internal rate of return (IRR) for investors if the investment performs well, as the debt repayment structures often favor cash distributions to equity holders after covering debt service obligations.

Other advantages of leverage in an LBO scenario can include potential tax efficiency, since interest on debt is often tax-deductible, and the magnification of overall return potential. However, the primary advantage highlighted here is clearly linked to the method of financing that results in higher returns due to reduced equity contribution, which is what makes option B the correct choice.