Answer (A) is correct . Unsystematic risk is unique to the firm and can be diversified in a combination, but shareholders can diversify simply by purchasing shares in a variety of firms. Diversification by individual shareholders is therefore easier and cheaper than by the firm except in the case of closely held firms.
Answer (B) is incorrect because A combination may permit an increase in the amount of debt in a firm’s optimal capital structure.
Answer (C) is incorrect because The managers of the acquired firm may be incompetent, or their goals may not be congruent with those of the shareholders.
Answer (D) is incorrect because A firm may be a target if its breakup value exceeds the cost of its acquisition. Thus, the acquirer may earn a profit by selling the assets piecemeal.
|
