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IAI Actuarial Core Principles · Business Finance · Corporate growth, restructuring and divestment

A company is considering selling a loss-making subsidiary to a trade buyer rather than liquidating it. Which is the most direct financial advantage of a sale (divestment) compared with closing the subsidiary?

The main advantage is that a sale produces cash proceeds, which the parent can reinvest in better projects or use to repay debt. Liquidation would normally realise only break-up values. A sale does not itself issue shares, raise gearing or remove consolidation duties.

  1. AIt generates sale proceeds that can be reinvested or used to repay debtCorrect
  2. BIt increases the number of shares in issue
  3. CIt automatically raises the parent's gearing
  4. DIt removes the need to prepare consolidated accounts for the remaining group
  5. It guarantees the buyer will keep all employees

Explanation

A sale gives cash proceeds, which can fund new investment or reduce debt. Closure usually yields only break-up values, and a sale does not by itself change the share count or raise gearing. The parent remains a group with other subsidiaries, so consolidation is still needed.

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