Merging in order to lower financing costs is likely to fail for the following reason:
A)Costs of issuing larger amounts of debt increase.
B)Tax shields decrease for larger companies.
C)Any gain from lowering the required interest rate is offset by increased guarantees on the debt.
D)It is difficult for bondholders to calculate the postmerger debt outstanding.

Question

Quizplus · Accepted Answer

Lowering financing costs through merging often involves issuing more debt, which increases the risk of default and requires additional guarantees. These increased guarantees offset any potential gains from a lower interest rate, making the merger less beneficial for the company.

Merging in Order to Lower Financing Costs Is Likely to Fail