When evaluating an acquisition you should:
A) concentrate on book values and ignore market values.
B) focus on the total cash flows of the merged firm but ignore incremental cash flows.
C) apply the rate of return that is relevant to the incremental cash flows.
D) ignore any one-time acquisition fees or transaction costs.
E) ignore any potential changes in management.

Question

Quizplus · Accepted Answer

When evaluating an acquisition, it is important to focus on the relevant incremental cash flows as they are the expected future cash flows that will result from the merger. Additionally, it is crucial to apply a rate of return that is relevant to these incremental cash flows, so that the decision to acquire is based on the profitability of the acquisition. Book values and market values, one-time fees or transaction costs, and potential changes in management can all be factors to consider, but they should not be the sole focus in the evaluation process.

When Evaluating an Acquisition You Should