Shareholders of a Company Being Merged with Another May Take

question 29

Multiple Choice

Shareholders of a company being merged with another may take bonds from the acquiring company in exchange for their shares instead of common shares in the new company. What advantage does this have for the acquired company shareholders?

• A) Even in periods of low earnings, interest charges must be paid to lenders, dividends can be withheld from shareholders.
• B) The return from holding debt is usually higher than from holding equity.
• C) Interest from debt is only tax deferred until the instrument is sold and dividends are taxed in the year they are issued, providing greater net return from debt.
• D) If the new company fails, all of the debt principle will be refunded.
• E) Payout to common share holders is always capped at a maximum level. The amount of interest paid to lenders increases with company profitability.

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