Which of the Following Statements Regarding Mergers and Taxes Is

question 24

Multiple Choice

Which of the following statements regarding mergers and taxes is false?

• A) Because it may be easier to measure performance accurately in a conglomerate, agency costs may be reduced and resources may be more efficiently allocated.
• B) Because employees holding a large fraction of their wealth in shares of the corporation for which they work are obligated to hold idiosyncratic risk, they benefit when the firm reduces that risk by conglomerating.
• C) Like a large portfolio, large firms bear less idiosyncratic risk, so often mergers are justified on the basis that the combined firm is less risky.
• D) Because most stockholders will already be holding a well-diversified portfolio, they get no further benefit from the firm diversifying through acquisition.

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