Question

"The imperfect correlation between the operating cash flows of the combining firms results in decreases to the value of pre-merger debt to the benefits of the shareholders." True or false?

Answer 1

An imperfect correlation is one where the variables tend to vary with different ratios. During the time of the merger, the operating cash flows remain at imperfection which increases the debt capacity of the firm because the chances of default go down. So the current statement is "incorrect" or “False” as it suggests that during the times of pre-merger the value of debt decreases with an imperfection in the correlation between the operating cash flows of the combining firm and in the value of the debt.