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In: Finance

Which of the following is not true of a divestiture? a. It may create cash infusion...

Which of the following is not true of a divestiture?

a. It may create cash infusion for the parent firm.

b. Parent entity ceases to exist.

c. The proceeds of the sale is taxable if returned to shareholders through a dividend or stock buyback.

d. A new legal subsidiary may be created.

e. B and C.

Solutions

Expert Solution

Answer is Parent entity ceases to exist. (which is Option B)

_____

Explanation:

One of the motives behind a divestiture can be to generate cash for the parent firm by selling/disposing of an unprofitable/non-performing or undervalued business operation. Therefore, a divestiture may create cash infusion for the parent firm. Therefore, Option A is true.

Parent company will continue to exist as the objective of divestiture could be to generate cash or focus on profitable/core business operations and not to sell off or close the entire business operations. Therefore, Option B is not true.

Any amount of proceeds realized from the sale of business operations/product line (in case of divestiture) will become taxable if such an amount is given as dividend or used for repurchasing parent company's shares. Therefore, Option C is true.

A divestiture can sometimes (thought it may not always) result in the creation of a new subsidiary/legal entity. Therefore, Option D is true.

jeff jeffy answered 1 year ago
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