Question

17. In general, merger & acquisition (M&A) transactions occur in waves where there are times of many, and then times of nearly none. a. TRUE b. FALSE

1. Which of the following theoretically hurts the company’s value the least?
   1. Raising equity
   2. Raising debt
   3. Raising equity and debt together
   4. Using the company’s retained earnings
2. Using debt to raise capital brings with it a beneficial interest payment tax shield.
   1. TRUE
   2. FALSE

Answer 1

Ans 17 : TRUE

The reason is that the process of merger and acquisition is in itself a very lengthy and complicated process. One of the main issue which takes a lot of time is the valuation of the target company. Due to the complexities involved in the mergers and acquisition transactions, it is true to be said that the M & A transactions occur in waves.

Ans 18 : Option (d) : Using Company’s retained earnings

The reason is that although each of the mentioned factors impacts the valuation to a certain extent. However, using equity or debt or both affects the valuation more than the use of retained earnings. The reason is that the use of debt increass the interest burden on the company whereas use of excess equity Dilutes the management's controlling stake.

Hence, the use of retained earnings has the least impact.

Ans 19 : TRUE

The interest payment on the issued debt is a tax deductible expense. Due to this, the company gets a tax shield on the amount of interest paid on the debt. Due to this reason, the cost of debt gets reduced by the rate of tax.