Assertion: One of the most crucial elements of an effective acquisition strategy is planning how one intends to finance the deal through an ideal capital structure.
Reasoning: A high leveraged structure reduces the interest burden of the company.
Reasoning: A high leveraged structure reduces the interest burden of the company.
Answer & explanation
Correct answer: option 3
High leverage : One of the most crucial elements of an effective acquisition strategy is planning how one intends to finance the deal through an ideal capital structure. The acquirer may decide to acquire the target through cash. To pay the price of acquisition, the acquirer may borrow heavily from the market. This creates a very high leveraged structure and increases the interest burden of the company. This increased interest cost may consume a big portion of the earnings and defeat the very purpose of acquisition.