which is NOT a benefit of debt financing from the acquirer’s perspective. A. EPS accretion B. Lower cost of capital C. Return on equity D. Lack of covenants
Question
which is NOT a benefit of debt financing from the acquirer’s perspective.
A. EPS accretion
B. Lower cost of capital
C. Return on equity
D. Lack of covenants
Solution
The option that is NOT a benefit of debt financing from the acquirer’s perspective is D. Lack of covenants.
Here's why:
A. EPS accretion: This is a benefit because if the earnings per share (EPS) increases post-acquisition, it means the acquisition is adding value to the shareholders' equity.
B. Lower cost of capital: Debt is usually a cheaper source of financing than equity. Therefore, by using debt to finance an acquisition, the acquirer can lower its overall cost of capital.
C. Return on equity: Debt financing can increase the return on equity because it allows the company to create additional earnings without increasing equity.
D. Lack of covenants: This is NOT a benefit. Debt covenants are terms and conditions that lenders put into place to protect themselves, which can limit the flexibility of the acquirer. Therefore, a lack of covenants would not be a benefit to the acquirer.
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