Suppose your firm could purchase another firm for only half of its replacement value. Would that be a sufficient justification for the acquisition? Why or why not?

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Suppose your firm could purchase another firm for only half of its replacement value. Would that be a sufficient justification for the acquisition? Why or why not?

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Suppose your firm could purchase another firm for only half of its replacement value. Would that be a sufficient justification for the acquisition? Why or why not?

Explanation & AnswerSolution by a verified expert

Explanation

Purchasing another firm at half of its replacement value is a rationale for acquisition because the firm can acquire other firm's assets for just half the amount of its assets' worth. This means that the acquiring firm can acquire the assets at only half of the price they would pay to purchase those assets at their fair value.Sometimes the cost of replacing an asset is higher than the market value of the asset. For example, a natural reserves company has reserves that have a higher value than the company's stock. This concludes that the company is undervalued and can produce gains in the future.

Verified Answer

A firm purchasing another firm at half of its replacement is a rationale for the acquisition. This is because the acquired firm's assets are worth double the amount paid for the acquisition, indicating that the company is undervalued.

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