To be acceptable to the acquirer, the total premium paid must be:
A)exactly the pre-merger value of the target firm.
B)zero.
C)no greater than the additional value to the acquirer created by the merger.
D)negative.
E)None of the above

Question

Quizplus · Accepted Answer

The acquirer will only be willing to pay a premium that is no greater than the value that will be created by the merger. If the premium is too high, the acquirer will not be able to generate a sufficient return on investment to justify the acquisition. Option A is incorrect because the acquirer must pay a premium over the pre-merger value of the target firm in order to acquire it. Option B is incorrect because even if the target firm has no value, the acquirer must pay something (other than $0) to acquire it. Option D is incorrect because a negative premium would imply that the acquirer is being paid to acquire the target firm, which is unlikely. Option E is incorrect because there is a specific condition for the premium paid to be acceptable to the acquirer.

To Be Acceptable to the Acquirer, the Total Premium Paid