Question

Which of the following are acceptable reasons for engaging in a merger? Select one:

a. A profitable firm acquires a firm with large accumulated tax losses that may be carried forward.
b. Attempts to stabilize earnings by diversifying.
c. Purchase of assets below their replacement costs.
d. Synergistic benefits arising from mergers.
e. All of the above

Answer 1

Mergers can occur for various reasons, including tax benefits, diversifying earnings, acquiring assets at a lower cost, and achieving synergistic benefits. The correct answer is e. All of the above

Step-by-step explanation:

Mergers occur when two separate firms join to become a single firm, while acquisitions involve one firm purchasing another. There are several acceptable reasons for engaging in a merger:

A profitable firm acquiring a firm with large accumulated tax losses: This allows the profitable firm to offset their income with the tax losses carried forward, reducing their tax liability.

Attempts to stabilize earnings by diversifying: Merging with another firm that operates in a different industry or has a different product line can help reduce the risk and volatility of earnings.

Purchase of assets below their replacement costs: If a firm can acquire assets at a lower cost than what it would take to replace them, it can result in cost savings and increased profitability.

Synergistic benefits arising from mergers: Merging with another firm can create synergies, such as cost savings, increased market power, and shared resources, that can lead to improved financial performance.

Therefore, the correct answer is e. All of the above.