Answer (D) is correct . Operational synergy arises because the combined firm may be able to increase its revenues and reduce its costs. For example, the new firm created by a horizontal merger may have a more balanced product line and a stronger distribution system. Furthermore, costs may be decreased because of economies of scale in production, marketing, purchasing, and management. Financial synergy may also result from the combination. The cost of capital for both firms may be decreased because the cost of issuing both debt and equity securities is lower for larger firms. Moreover, uncorrelated cash flow streams will provide for increased liquidity and a lower probability of bankruptcy. Still another benefit is the availability of additional internal capital. The acquired company is often able to exploit new investment opportunities because the acquiring company has excess cash flows.
Answer (A) is incorrect because A pooling of interests is a method of accounting that is no longer permitted for combinations initiated after June 30, 2001.
Answer (B) is incorrect because Consolidation occurs when a new company is formed after a merger, with neither merging company surviving.
Answer (C) is incorrect because Goodwill is the excess of the price paid over the fair value of the net assets acquired in a combination.
|
