Mergers Can Be fiNanced with Either Cash or Common Stock

question 306

Essay

Mergers can be financed with either cash or common stock of the acquiring firm. Three key factors
for consideration when deciding whether to use cash or common stock are control, taxes, and the
sharing of gains. Discuss each of these factors and how they affect the cash versus stock decision.

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Definitions:

Fannie Mae

A government-sponsored enterprise (GSE) aimed at expanding the secondary mortgage market by securitizing mortgages.

Mortgage-Backed Securities

Securities issued for the financing of large pools of mortgages. The promised returns to the security holders are derived from the mortgage interest payments.

Capital Requirement

The minimum amount of financial resources that a firm needs to conduct its business activities, often regulated in industries like banking.

Investment Banks

Financial institutions that assist individuals, corporations, and governments in raising capital by underwriting and/or acting as the client's agent in securities issuance.