Asked by Kymberly Corley on Jun 14, 2024

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The price at which a merger target's stock is acquired virtually always reflects a premium over its pre-merger market value because:

A) the acquirer is trying to fairly divide the gain it will make on the acquisition between its own stockholders and the target's.
B) it takes a substantial premium to get a large number of shareholders to sell at one time.
C) the combined firm generally has an increased value because of additional leverage.
D) the acquirer wants the target's shareholders to be happy about the merger because they will be among its shareholders after the transaction.

Pre-Merger Market Value

The total market valuation of a company before it enters into a merger agreement with another entity.

Merger Target's Stock

The shares of a company that is the potential or actual subject of an acquisition or merger.

Substantial Premium

A substantial premium refers to a significantly higher price paid over the current market value of an asset or company, typically in mergers and acquisitions.

  • Identify factors that influence the premium paid in merger transactions.
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Verified Answer

KC
Karinna CarballoJun 19, 2024
Final Answer :
B
Explanation :
It takes a substantial premium to get a large number of shareholders to sell at one time. Shareholders are likely to demand a premium to give up their ownership stake in a company, particularly if the company has been performing well and has strong potential for future growth. The premium is also designed to entice the target's shareholders to support the merger and vote in favor of it.