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Q Why is it difficult to draw conclusions on the diversification discount? Name one reason Q...

Q Why is it difficult to draw conclusions on the diversification discount? Name one reason

Q Why do firms in financial distress can have problems in raising funds from investors? Name one reason

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Answer #1

1. It is difficult to draw conclusions on the diversification discount since the results there is no strict correlation between the firm's value and the firm's choice to diversify. Often, there have been mixed results with some stocks that have diversified have been trading at a premium while for some the managers have not been able to put the cash flows to a singe source use thereby negating stock value.

2. The value of the firm reduces when in it is financial distress and investors may pass on a profitable investment to avoid any sort of risk.

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