A potential merger that produces synergy: Select one: a. Should be rejected due to the projected negative cash flows. b. Creates value and therefore should be pursued. c. Should be rejected because the synergy will dilute the benefits of the merger. d. Reduces the anticipated net income from the target firm. e. Has a net present value of zero.

b. Creates value and therefore should be pursued.

Explanation:

Synergy is a term and concept used in merger and acquisition, that the combined value and performance of two companies (to be involved in the merger) will be greater than the sum of the separate individual companies.

Shareholders will benefit if a company's post-merger share price increases due to the synergistic effect of the deal. Usually, merger and acquisition transactions result in a larger company, which has a higher bargaining power to get a lower cost of capital. Achieving a lower cost of capital as a result of a merger or acquisition is an example of Financial Synergy.

Synergies can be negative if a merger or acquisition is poorly executed. In some cases, forecasted cost savings actually turn into higher costs if the two businesses fail to integrate properly.

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