A Merger Should Not Take Place Simply for the Purpose

question 8

Multiple Choice

A merger should not take place simply for the purpose of:

• A) diversification if shareholders can accomplish the same result on their own portfolios.
• B) increasing the debt capacity for the tax shield gain.
• C) acquiring free cash flow to be put to use by the acquirer.
• D) reducing the cost of production.

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Definitions:

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates, often described as the weighted average time until all cash flows are paid.

Basis Points

A unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument, equal to 1/100th of 1%.

Duration

An indicator of how the price of a bond or other debt security responds to interest rate fluctuations, typically represented in years.

Market Yield

Market yield refers to the current rate of return anticipated on a bond if held to maturity, factoring in both its price and interest payouts compared to the market's interest rates.