Consider the following two statements: (i) In the presence of a u-shaped average cost curve, you are willing to pay a premium for a target if
It brings you closer to the optimal size.
(ii) In the presence of a u-shaped average cost curve, ﬁrms operating at minimum average cost are
Most likely to be acquirers.
A)(i) is correct, (ii) is incorrect.
B)(ii) is correct, (i) is incorrect.
C)Both (i) and (ii) are correct.
D)Both (i) and (ii) are incorrect.
E)(i) and (ii) only hold in a hostile takeover.

Question

Quizplus · Accepted Answer

Statement (i) is correct because as the average cost curve is u-shaped, getting closer to the minimum point will bring the costs down and increase efficiency. Therefore, paying a premium to acquire a target that brings the acquirer closer to the optimal size would be beneficial.

Statement (ii) is incorrect because the firms operating at minimum average cost will already be at the optimal size, and as a result, they are less likely to acquire other firms. The acquirers are more likely to be those firms that are still operating at a higher cost and have room for improvement in terms of efficiency.

Consider the Following Two Statements: (I) in the Presence of a U-Shaped