uestion 14 (2.5 points) D Which one of the following statements is Correct? The

Question

uestion 14 (2.5 points) D Which one of the following statements is Correct? The price-earnings ratio will remain constant as a result of an acquisition which fails to create value 1) 2) 3) The primary purpose of a flip-in provision is to reduce the market value of each share of 4) Diversification is one of the greatest benefits derived from an acquisition If no synergy is achieved when firm A acquires firm B, then the total value of the combined firm will equal the sum of the two separate firms. stock

Explanation / Answer

1. This statement is wrong since the price earnings ratio depends upon the price of share to the earnings per share. In case of an acquisition which does not create value, the price and earnings of the new company will be different from the acquired and hence its ratio will change.

2. This statement is correct since Synergy refers to the additional benefit resulting from acquisition. If there is no Synergy the total value of the new company will be the same as the value of the individual firms combined.

3. The primary purpose of a flip in provision is to dilute the ownership position of a corporate raider. Hence the statement is incorrect.

4. This statement is incorrect since the diversification may be a purpose of acquisition but synergies to consolidation is the greatest benefit that arises from an acquisition

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