A Spin-Off May Create Shareholder Wealth for All of the Following

question 27

Multiple Choice

A spin-off may create shareholder wealth for all of the following reasons except for

• A) Spin-offs are generally not taxable if properly structured
• B) The spin-off's management and board is independent of the former parent
• C) Investors will be better able to value the spin-off
• D) The cost of capital of the spin-off is generally higher than when it was part of the parent
• E) The spin-off may be subsequently acquired by another firm

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Definitions:

Long Run

A period of time in economic analysis where all factors of production and costs are variable, allowing for full adjustment to change.

Average Cost Curve

A graphical representation that shows the cost per unit of output at different levels of production.

Marginal Cost

The extra expense associated with manufacturing an additional unit of a good or service.

Cost of Capital

The rate of return that a company must earn on its investment projects to maintain its market value and attract funds, including the cost of debt and equity financing.