Which one of the following statements is correct?
A) The IRS automatically approves acquisitions that are primarily designed to lower federal taxes.
B) The leverage associated with an acquisition increases the tax liability of the acquiring firm.
C) A firm may benefit from an acquisition if it can lower its capital requirements.
D) Firms can always benefit from economies of scale if they increase the size of their firm through acquisitions.
E) If a firm uses its surplus cash to acquire another firm, then the shareholders of the acquiring firm immediately incur a tax liability related to the transaction.

Question

Quizplus · Accepted Answer

A firm may benefit from an acquisition if it can lower its capital requirements. This is because an acquisition can lead to cost savings and increase in efficiency, which in turn can reduce the amount of capital required to run the business. Option A is incorrect because the IRS scrutinizes acquisitions primarily designed to lower federal taxes. Option B is incorrect because leverage can increase the tax liability of acquiring firm. Option D is incorrect because economies of scale may not always result from an acquisition. Option E is incorrect because the tax liability related to the transaction depends on various factors and is not always automatic.

Which One of the Following Statements Is Correct