Answer (B) is correct. Undervaluation of the firm to be acquired may result if the market focuses on short-term earnings rather than long-term prospects. Such a firm may be a bargain for the acquirer. Another aspect of undervaluation is that a firm’s q ratio (market value of the firm’s securities ÷ replacement cost of its assets) may be less than one. Hence, an acquiring firm that wishes to add capacity or diversify into new product lines may discover that a combination is less expensive than internal expansion.