If a Merger Creates Synergy, Then The

question 31

Multiple Choice

If a merger creates synergy, then the:

• A) merger is classified as a taxable transaction.
• B) acquiring firm's shareholders will receive a one-time cash payment.
• C) equity of the target firm will be increased by the amount of the synergy.
• D) value of the merged firm exceeds the combined value of the separate firms.
• E) price paid by the acquiring firm will be reduced by the amount of that synergy.

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Definitions:

Payback

Payback is the period of time required for the return on an investment to "pay back" the sum of the original investment, often used as a measure of investment risk.

Cash Flow

Cash flow signifies the net amount of cash and cash-equivalents being transferred into and out of a business, crucial for assessing its liquidity, flexibility, and overall financial performance.

Project's Payback

A calculation that determines the duration required for an investment to generate cash flows or profits enough to recover the initial investment cost.

WACC

Weighted Average Cost of Capital; the average rate of return a company must pay its security holders to finance its assets.