When Evaluating an Acquisition You Should

question 78

Multiple Choice

When evaluating an acquisition you should:

• A)concentrate on book values and ignore market values.
• B)focus on the total cash flows of the merged firm.
• C)apply the rate of return that is relevant to the incremental cash flows.
• D)ignore any one-time acquisition fees or transaction costs.
• E)ignore any potential changes in management.

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Definitions:

Separate Entity Assumption

An accounting principle that treats a company as an independent entity separate from its owners for reporting purposes.

Noncurrent Asset

A noncurrent asset is a long-term investment or property that a company does not expect to convert into cash within one year.

Investing Cash Flow

Investing cash flow refers to the cash inflows and outflows associated with the purchase and sale of long-term investments and capital assets.

Current Ratio

A liquidity ratio that measures a company's capacity to pay off its short-term liabilities with its short-term assets.