Firm A's shareholders will be better off with a stock offer than with a cash offer if A makes too generous of an offer for Firm B.

Question

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If Firm A makes too generous of an offer for Firm B, the shareholders of Firm A will be worse off with a cash offer because they will have to pay more for Firm B's assets. With a stock offer, the shareholders of Firm A will receive shares of Firm B, which will increase in value if Firm B's assets are worth more than what Firm A paid for them.

Firm A's Shareholders Will Be Better Off with a Stock