Merging in Order to Lower Financing Costs Is Likely to Fail

question 51

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:

Cost of Capital

The cost of funds used for financing a business, including the rate of return that investors demand for providing capital.

Cash Flows

The comprehensive total of financial resources entering and leaving a business, significantly affecting its ability to cover immediate and short-term obligations.

Marginal Costs

The monetary cost of generating one more unit of a product or service.

Fixed Costs

Expenses that remain constant regardless of the amount of goods produced or sold, including items like lease payments, wages, and insurance fees.