A spin-off may create shareholder wealth for all of the following reasons except for
A) Spin-offs are generally not taxable if properly structured
B) The spin-off's management and board is independent of the former parent
C) Investors will be better able to value the spin-off
D) The cost of capital of the spin-off is generally higher than when it was part of the parent
E) The spin-off may be subsequently acquired by another firm

Question

Quizplus · Accepted Answer

The cost of capital of the spin-off is generally higher than when it was part of the parent, which can lead to reduced shareholder wealth. This is because the spin-off may have a smaller size and less diversification, which can increase its risk profile and make it more difficult to obtain financing at favorable rates. All of the other choices (A, B, C, and E) can potentially create shareholder wealth by improving the value or prospects of the spin-off. A properly structured spin-off can avoid taxes, giving more cash to shareholders. An independent management and board can focus on the unique needs of the spin-off, leading to more effective decision-making. A clearer understanding of the spin-off's operations and financials may lead to more accurate valuations by investors. Finally, the possibility of being acquired by another firm can result in a premium price for the spin-off's shares.

A Spin-Off May Create Shareholder Wealth for All of the Following