If the entire $1000 purchase price had been paid in cash instead of 50/50, what would be the immediate effect on the acquirer's cash balance?

If the entire $1000 purchase price had been paid in cash instead of 50/50, what would be the immediate effect on the acquirer's cash balance?

• A. Decrease by 1000
• B. Increase by 1000
• C. No change
• D. Decrease by 500

Answer: (A)

Paying the entire purchase price in cash means the acquirer sends out 1000 in cash immediately, so its cash balance decreases by 1000 right away. The financing method only changes how much cash leaves the balance sheet at that moment; a 50/50 arrangement would have 500 paid in cash, with the remaining 500 funded through debt or other financing. So paying all in cash results in a larger immediate cash outflow: a decrease of 1000. The other possibilities (cash increasing, no change, or a decrease of 500) don’t fit because they imply less cash leaving the business than the full purchase price paid upfront.

Paying the entire purchase price in cash means the acquirer sends out 1000 in cash immediately, so its cash balance decreases by 1000 right away. The financing method only changes how much cash leaves the balance sheet at that moment; a 50/50 arrangement would have 500 paid in cash, with the remaining 500 funded through debt or other financing. So paying all in cash results in a larger immediate cash outflow: a decrease of 1000. The other possibilities (cash increasing, no change, or a decrease of 500) don’t fit because they imply less cash leaving the business than the full purchase price paid upfront.