AC450 Unit2 Discussion - Topic#1 Subsidiary Purchase When a...

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Topic #1: Subsidiary Purchase When a parent company looks to purchase a subsidiary, there are many ways to fund the purchase. The two most popular ways to pay for the new acquisition are: (1) To give the subsidiary cash for its acquisition, and (2) To give the subsidiary ownership percentage within the parent. Based on these facts, answer the following questions: What are the advantages and disadvantages of each of the purchase methods? When you acquire another company using cash, the amount that will be paid is certain. It is a less risky transaction for both companies than a stock acquisition, because cash does not fluctuate in value like stocks do. Another advantage of using a cash acquisition is it prevents dilution of ownership of your company. A disadvantage of using a cash acquisition is that you will spend down your cash reserves, your company's most liquid asset. A cash acquisition can also result in debt problems if you finance the purchase with bank loans (Rodeck, 2016).
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