Business Studies

Business Finance

Easy

Hind Beverages

Hind Beverages Inc., the leading soft drink and drinking water company in the private sector, has acquired Himalayan Water Co., in a deal worth $8.6 billion in 2007 to further expand its market share. A financial decision of this magnitude has significant implicitness for both Hind Beverages Inc and Himalayan Water as well as their employees and shareholders.

Hind Beverages Inc. raised a debt of over $8 billion to finance the transaction. This financing decision affected the capital structure of the acquirer.

What will be the net effect on the acquirer company's capital structure after the acquisition?

Financial risk will increase

Financial risk will decrease

Operating risk will increase

Operating risk will decrease

✅ Correct Option: 1

Hind Beverages financed the acquisition by raising over $8 billion of debt, sharply increasing the proportion of debt in its capital structure. A higher debt component increases fixed interest obligations and the chance of default, i.e. financial risk rises. Operating risk depends on business operations, not the financing mix. Hence option 1.

Question 42

What may be the reason behind the acquisition of Himalayan Water Co. by Hind Beverages Inc.?

Question 43

Identify the source of debt that a company might have used to raise $8 billion to finance the transaction.

Question 44

Why might a company prefer debt over equity for financing?

Question 45

Which of the following statements is NOT correct about capital structure?

What will be the net effect on the acquirer company's capital structure after the acquisition?

Solution

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