In a merger or acquisition, a ﬁrm should be acquired if it:
A)generates a positive net present value to the shareholders of an acquiring ﬁrm.
B)is a ﬁrm in the same line of business, in which the acquirer has expertise.
C)is a ﬁrm in a totally different line of business which will diversity the ﬁrm.
D)pays a large dividend which will provide cash pass through to the acquiror.
E)None of the above.

Question

Quizplus · Accepted Answer

The primary objective of a merger or acquisition is to create value for the shareholders of the acquiring firm. Therefore, a firm should only be acquired if it generates a positive net present value to the shareholders of the acquiring firm. Options B and C may also be considered in some cases, but the ultimate goal remains value creation. Option D is not a valid reason for acquisition as dividend payments do not necessarily reflect the true value of a firm.

In a Merger or Acquisition, a ﬁRm Should Be Acquired