In a merger or acquisition,a firm should be acquired if it:
A)generates a positive net present value to the shareholders of the acquiring firm.
B)is a firm in the same line of business in which the acquirer has expertise.
C)is a firm in a totally different line of business which will diversify the firm.
D)pays a large dividend which will provide a cash pass through to the acquirer.
E)increases the firm's market share.

Question

Quizplus · Accepted Answer

The primary goal of a merger or acquisition is to generate value for the shareholders of the acquiring firm. A firm should be acquired only if it generates a positive net present value (NPV) for the acquiring firm's shareholders, i.e., the present value of future cash flows from the target firm should exceed the cost of acquisition. The acquisition of a firm that generates a positive NPV would increase the wealth of shareholders of the acquiring firm. Therefore, option A is the best choice. Options B, C, D, and E may or may not generate a positive net present value for the shareholders of the acquiring firm, and hence, they cannot be considered as the best choice.

In a Merger or Acquisition,a Firm Should Be Acquired If