CFA Practice Question

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CFA Practice Question

Which of the following groups of financial statement users is most likely to use financial information as a decision-making tool to evaluate a merger or acquisition candidate?

A. Equity investors
B. Short-term and long-term creditors
C. Company management
Correct Answer: A

User Contributed Comments 10

User Comment
tomn Company management knows the "inside" financial info so well so it does not use financial statements as the decision-making tool, but a supplementary tool.
cfairs Acquiring management will want to look at financial statements of the acquiree candidate

Short-term and long-term creditors supporting the acquisition will want to look at the financial statements..

But maybe equity investors MOST likely to ...
tiamiyu A is the answer to the question because they are the owner of the firm.
Rchan89 A and B both seem to work. They'd both look at fin. statements to evaluate a M&A..

I agree that management would not use the statements as they already know all the financial info. But why not short/long term creditors
johntan1979 A is MOST LIKELY, since stockholders are the last to get anything (if there's any left) should anything go wrong.
vatsal92 Since the question deals with M&A, the answer can only be A because short-term and long term-creditors are more concerned about liquidity and earning growth and company management already knows the financial info.
Huricane74 @RChan89:

Short term creditors are usually banks or other financial institutions that issue commercial paper and revolving lines of credit to businesses.

Long term creditors are usually commercial banks or investment banks that issue syndicated loans or bonds to businesses.

The goal of these financial institutions is not to acquire another firm but to insure the repayment of the loans, bonds, commercial paper and bonds they have issued.

Thus, these financial institutions are interested in things like liquidity, free cash flow and adjusted funds from operations.
Huricane74 I disagree with the answer.

The caveat in the question is: who uses financial information to evaluate a merger or acquisition.

Equity investors evaluate financial statements when purchasing equity / stocks. Equity investors are buying shares in a company versus actually acquiring a firm.

Financial institutions and banks evaluate financial statements when making loans.

The parties that evaluate financial statements when making a merger or acquisition include:
1.) Private equity and Venture Capital Firms
2.) The management will evaluate the financial statements of the firm they are merging with or acquiring.
jzty You may think a merger or acquisition as an extreme situation of equity investment.
Jade-sola I agree with Huricane74. It is the management of the acquiring company that evaluates the financial statements of the firm they are trying to acquire.
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