Which of the Following Statements Is Most CORRECT

question 20

Multiple Choice

Which of the following statements is most CORRECT?

• A) Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may affect the firm's capital structure, it will not affect its overall required rate of return.
• B) The basic rationale for any financial merger is synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis.
• C) In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms.
• D) The primary rationale for most operating mergers is synergy.
• E) The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the 2 firms will have similar betas.

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Definitions:

Flotation Cost

The total costs that a company incurs when it issues new securities, including underwriting, legal, and registration fees.

Annual Dividend

The total amount of dividends a company pays to its shareholders in one year, usually presented on a per share basis.

WACC

Weighted Average Cost of Capital; a calculation of a company's cost of capital in which each category of capital is proportionately weighted.

Corporate WACC

The weighted average cost of capital for a corporation, reflecting the cost of its equity and debt financing.