According to the free-cash-flow theory of takeovers, post-merger gains in market value represent:
A)An illogical assessment of earnings prospects
B)The remaining costs of the merger
C)The present value of free-cash-flow that will no longer be misused
D)Losses experienced by arbitrageurs and other speculators

Question

Quizplus · Accepted Answer

The free-cash-flow theory of takeovers suggests that post-merger gains in market value represent the present value of free-cash-flow that will no longer be misused. This theory suggests that the acquiring company can better utilize the target company's free cash flow, leading to increased value for shareholders. Therefore, option C is the best choice. Option A is incorrect as the theory assumes that future earnings prospects are logical. Option B is incorrect as it suggests that there are remaining costs associated with the merger. Option D is incorrect as it suggests that arbitrageurs and speculators experience losses, which is not necessarily the case.

According to the Free-Cash-Flow Theory of Takeovers, Post-Merger Gains in Market