Which of the following is an important factor driving the decision on whether the firm uses cash or stocks to acquire another value enhancing firm?

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BlackTom AI · Accepted Answer

Question restatement: The prompt asks which factor is important in deciding whether a firm should pay with cash or with its own stock to acquire another firm that would enhance value.
Option 1: 'whether the acquisition will result in a larger firm' This is more about strategic goals or the scale of the deal rather than the fundamental cash-vs-stock decision. While a larger post-acquisition firm might be desirable, it doesn’t directly drive the choice between using cash or stock in the transaction.
Option 2: 'whether the target firm has a lot of tangible assets' The asset mix of the target affects collateral, financing needs, and tax depreciation, but it is not the core determinant of the cash-versus-stock choice. The decision hinges more on relative valuation and financing considerations than asset heaviness.
Option 3: 'whether is a hostile or friendly takeover' The nature of the takeover influences negotiation dynamics and potential antitakeover defenses, but it is not the primary determinant of whether cash or stock is used. The structure can be influenced by the bidder’s and target’s preferences, but it doesn’t by itself dictate the fundamental payment method.
Option 4: 'whether the target firm's stock is undervalued' This is the key factor. If the target’s stock is undervalued, the acquirer can effectively pay with overvalued stock (in relative terms) or issue stock at a favorable rate, making stock a cheaper form of consideration. Conversely, if the target’s stock is fairly valued or overvalued, cash may be preferred to avoid issuing expensive stock. In practice, undervaluation of the target stock makes stock-financed deals more attractive to the acquirer and can preserve cash for other uses, while valuation plays a central role in the decision between cash and stock payment.

SP25-BL-BUS-F402-4299 Final Exam (optional)

Which of the following is an important factor driving the decision on whether the firm uses cash or stocks to acquire another value enhancing firm?

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