What formula is used to calculate the Annual LBO Return?

The formula for calculating the Annual Leveraged Buyout (LBO) Return is indeed based on the relationship between the ending firm value and the initial equity investment over a specified period. The correct choice highlights that to calculate the annualized return, the formula takes the ratio of the firm value at the end of the period to the equity portion, raises it to the power of the reciprocal of the period (to bring it to an annual basis), and then subtracts one to convert this ratio into a percentage return.

This method effectively captures the compounded growth over the investment period and provides a standard metric for evaluating the profitability of the LBO investment on an annual basis. The raising of the ratio to the power of ( \frac{1}{\text{period}} ) takes into account the effects of compounding, which is crucial for understanding how investments grow over time.

The other choices represent different financial metrics that do not specifically measure the annual return from a leveraged buyout. For instance, net income divided by total equity gives a return on equity, not an annualized return based on terminal value. Similarly, firm value divided by total assets does not relate directly to returns but rather focuses more on asset utilization or capital structure. The calculation involving the difference