Question

Which of the following is not a good reason for a merger to take place？
O increasing the debt capacity for the tax shield gain O acquiring free cash flow to be put to use by the acquirer O increased market share of the combined firm O reducing the cost of production O diversification if shareholders can accomplish the same result on their own portfolios

Answer 1

Option ,diversification if shareholders can accomplish the same result on their own portfolios

Reason : Mergers are taken up for the following reason:

1. Tax shield for unused debt capacity [ meets the first option]

2. A cash rich company may acquire a well do to business and utilize the liquidity position [ meets second option]

3. The market share of the combined companies is higher [ meets the third option]

4. Mergers have synergies and economies of scale [ meets fourth option]

5 .Diversification in mergers assists the firm rather than the shareholders.