The Cost of a Merger May Outweigh the Potential Gain

question 39

Multiple Choice

The cost of a merger may outweigh the potential gain if the:

• A) present value of the acquired firm exceeds the price paid for it.
• B) present value of the merged firms is greater than the sum of their individual values.
• C) merger allows cost savings to occur.
• D) acquired firm's shareholders receive more than the value of their firm.

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Definitions:

Shareholders

Individuals or entities that own shares in a corporation, thus having a claim on part of the company's assets and earnings.

Security Selection

The process of choosing stocks or other securities for investment, aiming to achieve better performance than a selected benchmark.

Asset Classes

Categories of assets, such as stocks, bonds, real estate, and commodities, that exhibit similar characteristics and behave similarly in the marketplace.

Agency Problems

Conflicts of interest that arise when there's a disconnect in objectives between decision-makers (agents) and the owners (principals) of an entity.