Chartered Financial Analyst Level 2

Explanation

Option B is correct - An equity investment typically requires a smaller capital investment compared to an acquisition because:

• Acquisition involves purchasing a controlling stake (usually 50%+ ownership) or the entire company, which requires substantial capital
• Equity investment usually involves purchasing a minority stake (less than 50% ownership), requiring significantly less capital

Why the other options are incorrect:

• Option A: Equity investments generally provide less control than acquisitions. Acquisitions give the acquiring company full control over the target's operations and strategic decisions.

• Option C: Equity investments do not result in a larger combined balance sheet. Under equity method accounting, only the investor's proportionate share of the investee's net assets is reflected on the balance sheet, whereas acquisitions typically result in full consolidation of the target's assets and liabilities.

Key Differences:

• Control: Acquisition = high control; Equity investment = limited influence
• Capital: Acquisition = large investment; Equity investment = smaller investment
• Accounting: Acquisition = consolidation; Equity investment = equity method accounting