Which of the Following Statements Best Describes Mergers

question 5

Multiple Choice

Which of the following statements best describes mergers?

• A) Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.
• B) The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.
• C) Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.
• D) Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm.

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Definitions:

Exclusive Right

A legal provision that allows only the holder to perform a specific activity or use a particular property.

Socially Efficient Quantity

The level of production or consumption that maximizes social welfare, taking into account all external costs and benefits.

Demand Curve

A graphical representation of the relationship between the price of a good and the quantity demanded by consumers.