Skip to content

ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers

Alder plc plans to acquire Birch Ltd for a cash offer of $120 million. Alder will fund the whole price with new bank borrowing at 6% pre-tax. Which statement best describes a key risk of this financing choice for Alder's shareholders?

Funding a cash bid with new debt raises Alder's gearing, increasing financial risk for its shareholders and likely raising the cost of equity. Birch holders are paid in cash, so they bear no post-deal share price risk, and Alder's voting control is not diluted.

  1. ACash offers expose Birch shareholders to future share price movements of the combined company
  2. BHigher gearing increases financial risk and may raise Alder's cost of equityCorrect
  3. CBorrowing eliminates any need to consider Alder's interest cover
  4. DA cash offer dilutes Alder's existing shareholders' voting control

Explanation

Debt funding raises gearing, which increases financial risk for equity holders and, under Modigliani-Miller with taxes and distress costs, tends to push up the cost of equity. Option A describes a share exchange, not a cash offer. Option D is wrong because no new shares are issued in a cash offer.

Did you get it right without looking?

One question tells you little. A timed set on Financing acquisitions and mergers shows your real accuracy, how long you take and where you lose marks.

Practise Financing acquisitions and mergersFree diagnostic mock

More Financing acquisitions and mergers questions