The synergy of an acquisition between Firm A and Firm B can be determined by:
A) subtracting the change in cost from the change in revenue.
B) subtracting the change in taxes form the change in revenue.
C) subtracting the change in capital requirements from the change in revenues.
D) discounting the change in the cash flows of the combined firm by the risk adjusted discount rate.
E) discounting the change in the revenues of the combined firm by the risk adjusted discount rate.

Question

Quizplus · Accepted Answer

The best way to determine the synergy of an acquisition between two firms is to discount the change in the cash flows of the combined firm by the risk adjusted discount rate. This gives a more accurate measure of the future cash flows that will result from the acquisition, and takes into account the risk involved in the investment. The other options (A, B, C, and E) either do not take into account all the relevant factors, or are not an accurate way to measure the success of the acquisition.

The Synergy of an Acquisition Between Firm a and Firm