Why might shareholders of an acquiring firm prefer to finance mergers with stock rather than with cash?
A) Stock financing is always less costly due to tax consequences.
B) The EPS decreases when mergers are financed with cash.
C) Target-firm shareholders will bear part of the cost if merger benefits were overestimated.
D) All merger gains go to the acquirer when financed with stock.

Question

Quizplus · Accepted Answer

When a merger is financed with stock, the shareholders of the acquiring firm are not required to pay out cash, which can be beneficial if the firm is short on cash reserves. Additionally, if the merger benefits turn out to be overestimated, the target-firm shareholders who received the stock will bear part of the cost instead of the acquiring firm's shareholders.

Why Might Shareholders of an Acquiring Firm Prefer to Finance