Series 79 practice questionmediumCapital Structure in M&A
In advising a client considering an acquisition funded 100% by debt, which of the following should an investment banker most highlight?
- AThe potential for increased financial risk and reduced flexibility✓ Correct answer
- BThe guaranteed reduction in the company’s WACC
- CThe automatic improvement of the target’s equity value
- DThe elimination of any future need for equity financing
Explanation
Why A — The potential for increased financial risk and reduced flexibility
High debt financing increases financial risk and reduces flexibility. WACC may not always decrease, target equity value is not guaranteed to improve, and future equity needs may still arise.
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