Which of the Following Is Not True About Why Firms

question 96

Multiple Choice

Which of the following is not true about why firms prefer to acquire existing assets rather than undertake greenfield investments?

• A) Foreign firms are acquired because those firms have valuable strategic assets.
• B) Firms make acquisitions because they believe they can increase the efficiency of the acquired unit by transferring capital, technology, or management skills.
• C) Firms make acquisitions because they believe it will make more profits for the home firm and home country.
• D) Mergers and acquisitions are quicker to execute than greenfield investments.
• E) Mergers and acquisitions are cheaper than greenfield investments.

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Definitions:

Financial Forecast

A prediction of future revenues, expenses, and profits for a specific period.

Fixed Assets

Long-term tangible assets that are used in the operations of a business and are not expected to be consumed or converted into cash within a year.

Default Risk

The risk that a borrower will not pay the interest and/or principal on a loan as it becomes due. If the issuer defaults, investors receive less than the promised return on the bond. Default risk is influenced by both the financial strength of the issuer and the terms of the bond contract, especially whether collateral has been pledged.

Interest Rate Risk

Arises from the fact that bond prices decline when interest rates rise. Under these circumstances, selling a bond prior to maturity will result in a capital loss; the longer the term to maturity, the larger the loss.