Series 79 practice questionhardCapital Structure and M&A Financing
A sponsor-backed company is being advised to finance a large acquisition with both debt and equity. Which of the following statements best describes how this blended financing can affect the company’s post-transaction WACC?
- AWACC may be minimized by optimizing the mix of debt (for the tax shield) and equity (to control financial risk).✓ Correct answer
- BWACC will automatically increase, as acquisitions always increase risk.
- CBlended financing ensures WACC is at its lowest possible level.
- DUsing both debt and equity eliminates the risk of financial distress.
Explanation
Why A — WACC may be minimized by optimizing the mix of debt (for the tax shield) and equity (to control financial risk).
A mix of debt and equity can minimize WACC if the optimal balance between the tax shield and risk is identified. Acquisitions do not always guarantee higher WACC, nor does blended financing guarantee the lowest WACC or eliminate distress risk.
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