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.
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 incremental cash flows of the merged firm that are relevant to the acquisition. This requires applying the appropriate rate of return to these cash flows. Ignoring potential changes in management and one-time acquisition fees can also lead to inaccurate evaluations. Book values should not be the sole focus, as they may not reflect the true value of the assets being acquired. Market values should also be considered. Therefore, choice C is the best option as it takes into account the relevant cash flows and the appropriate rate of return.

When Evaluating an Acquisition, You Should