Which of the following is an advantage of a spin-off versus selling a subsidiary and distributing the cash?
A) A spin-off increases the transaction costs associated with selling the subsidiary.
B) Shareholders must immediately pay capital gains taxes versus ordinary income taxes on the value of the spin-off.
C) A spin-off guarantees a lower cost of capital.
D) The spin-off is not taxed as a cash distribution.

Question

Quizplus · Accepted Answer

The spin-off is not taxed as a cash distribution, which can result in tax savings for both the parent company and the shareholders. This option allows for the creation of a separate entity with its own set of financials, which can lead to a higher valuation of the spun-off entity and potentially lower the overall cost of capital. Selling a subsidiary and distributing the cash can be simpler and quicker, but it may result in higher transaction costs and immediate capital gains taxes for shareholders.

Which of the Following Is an Advantage of a Spin-Off