Which of the following is the most appropriate reason for an acquiring firm's shareholders to prefer using stock financing for acquisitions?
A) There is no cash outflow.
B) It mitigates the effects of overvaluation of the target firm.
C) It mitigates the effects of undervaluation of the target firm.
D) It avoids dilution of shares.

Question

Quizplus · Accepted Answer

Using stock financing for acquisitions can help mitigate the effects of overvaluation of the target firm because the acquiring firm's shareholders are not required to pay cash and instead use their overvalued shares to pay for the acquisition. This allows them to avoid paying too much cash for a potentially overpriced target firm. Option A is incorrect because there is still a cash outflow if the acquiring company needs to issue new shares to finance the acquisition. Option C is incorrect because using stock financing for acquisitions may exacerbate the effects of undervaluation, as the target firm's shareholders may not receive enough value in the acquiring company's shares. Option D is incorrect because using stock financing may lead to dilution of shares if the acquiring company needs to issue new shares to finance the acquisition.

Which of the Following Is the Most Appropriate Reason for an Acquiring