Which of the Following Statements Regarding Mergers and Diversification Is

question 29

Multiple Choice

Which of the following statements regarding mergers and diversification is FALSE?

• A)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.
• B)Because it may be easier to measure performance accurately in a conglomerate, agency costs may be reduced and resources may be more efficiently allocated.
• C)Because most shareholders will already be holding a well-diversified portfolio, they get no further benefit from the firm diversifying through acquisition.
• D)Because employees are obligated to hold idiosyncratic risk, they benefit when the firm reduces that risk by conglomerating.

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Definitions:

Consolidated Income Tax Return

A single income tax return filed by a parent company and its subsidiaries, allowing for the consolidation of taxable income and tax payments to simplify tax reporting.

Significant Influence

This refers to the power to participate in the financial and operating policy decisions of an investee but is not control or joint control over those policies.

Intra-entity Transfers

Transactions involving the transfer of goods, services, or resources within the same legal entity.

Deferred Intra-entity Gross Profits

Profits resulting from intra-entity transactions that are not immediately recognized for accounting purposes but deferred to future periods.