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CA Final · Advanced Financial Management · Mergers, Acquisitions and Corporate Restructuring

Which of the following best describes financial synergy in a merger?

Financial synergy is the benefit from a lower cost of capital or greater debt capacity, typically when combining firms with imperfectly correlated cash flows reduces risk. Cost savings, pricing power and cross-selling are operating or revenue synergies, not financial ones.

  1. ASavings from eliminating duplicate administrative staff
  2. BHigher selling prices due to reduced competition
  3. CLower cost of capital or higher debt capacity because the combined firm has less volatile cash flowsCorrect
  4. DCross-selling of products through a shared distribution network

Explanation

Financial synergy arises from a lower cost of capital, greater debt capacity, or tax benefits, often through co-insurance of uncorrelated cash flows. The other options are operating synergies (cost savings), market power, and revenue synergies.

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