Merging in Order to Lower Financing Costs Is Likely to Fail

question 4

Multiple Choice

Merging in order to lower financing costs is likely to fail for the following reason:

• A)costs of issuing larger amounts of debt increase.
• B)tax shields decrease for larger companies.
• C)any gain from lowering the required interest rate is offset by increased guarantees on the debt.
• D)it is difficult for bondholders to calculate the postmerger debt outstanding.

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Definitions:

Delta

In finance, delta represents the rate of change of an option's price with respect to the change in the underlying asset's price.

Gamma

A measure of the rate of change in an option's delta for a one-unit change in the price of the underlying asset, indicating the convexity of an option's value relative to the underlying.

Theta

A term from options trading that describes the rate of change in an option's price with respect to the passage of time.

Elasticity

A measure of how much the demand or supply of a product changes in response to changes in price or other economic factors.