When a ﬁrm makes an acquisition to exploit the unused debt capacity of the acquired ﬁrm it is seeking __________.
A) revenue enhancements
B) cost savings
C) tax gains
D) changes in capital requirements
E) economies of scale

Question

Quizplus · Accepted Answer

When a firm makes an acquisition to exploit the unused debt capacity of the acquired firm, it is seeking tax gains. This is because the interest on debt is tax-deductible, and by increasing the debt capacity of the firm, the acquiring firm can use the tax shield to reduce its own tax liability.

When a ﬁRm Makes an Acquisition to Exploit the Unused