Which one of the following statements is correct?

A) A firm must realize some synergy as a result of a merger if the earnings per share of the acquiring firm increase.
B) Any diversification achieved through a merger is valued by investors.
C) Any increase in earnings per share due to a merger provides financial reasoning for an increase in the stock price per share.
D) Firms with surplus cash need to justify an acquisition as having a business purpose other than the avoidance of a dividend distribution.
E) Diversification is one of the greatest benefits derived from an acquisition.

Question

krystal lorzano · Accepted Answer

Final Answer : D, Explanation :  An increase in earnings per share (EPS) after a merger does not necessarily mean synergy is realized; it could be due to other factors such as cost-cutting. Investors may not always value diversification achieved through a merger, as they can diversify their own portfolios. An increase in EPS due to a merger does not automatically justify an increase in stock price, as the market considers many factors. Diversification is not universally considered one of the greatest benefits of an acquisition; strategic fit and potential for synergy are often valued more. However, firms with surplus cash are indeed scrutinized to ensure that acquisitions have a business purpose beyond just avoiding dividend distribution, making option D correct.

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