6.2 M&A Deals and Merger Models - Accretion/Dilution Calculations EXAM Questions With Correct Solutions
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Wall Street Prep
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Wall Street Prep
1. Company A, with a P / E of 25x, acquires Company B for a purchase P / E multiple of 15x. Will the deal be accretive? - ANS You can't tell unless you know that it's a 100% Stock deal.
If it is a 100% Stock deal, then it will be accretive because the Buyer's P / E is higher than the Seller's,...
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, 1. Company A, with a P / E of 25x, acquires Company B for a purchase P / E multiple of
15x. Will the deal be accretive? - ANS You can't tell unless you know that it's a 100%
Stock deal.
If it is a 100% Stock deal, then it will be accretive because the Buyer's P / E is higher
than the Seller's, indicating that the Buyer's Cost of Acquisition (, or 4%) is less
than the Seller's Yield (, or 6.7%).
2. Walk me through the full math for the deal now.
K
Assume that Company A has 10 shares outstanding at a share price of $25.00, and its
Net Income is $10.
C
It acquires Company B for a Purchase Equity Value of $150. Company B has a Net
Income of $10 as well. Assume the same tax rates for both companies. How accretive is
LO
this deal? - ANS Company A's EPS is $ = $1.00.
To do the deal, Company A must issue 6 new shares since $150 / $25.00 = 6, so the
Combined Share Count is 10 + 6 = 16.
YC
Since no Cash or Debt were used and the tax rates are the same, the Combined Net
Income = Company A Net Income + Company B Net Income = $10 + $10 = $20.
The Combined EPS, therefore, is $ = $1.25, so there's 25% accretion.
D
3. Company A now uses Debt with an Interest Rate of 10% to acquire Company B. Is
the deal still accretive? At what interest rate does it change from accretive to dilutive? -
U
ANS The Weighted Cost of Acquisition would be 10% * (1 - 20%), or 8%, so the deal
would not be accretive because that Cost is greater than the Seller's Yield of 6.7%.
ST
For the deal to turn accretive, the After-Tax Cost of Debt would have to be below 6.7%.
Since 6.7% / (1 - 20%) = 8.5%, the deal would turn accretive at an interest rate below
8.5%.
4. What are the Combined Equity Value and Enterprise Value in this deal?
Assume the original 100% Stock structure, and that Equity Value = Enterprise Value for
both the Buyer and Seller. - ANS Combined Equity Value = Buyer's Equity Value +
Value of Stock Issued in the Deal = $250 + $150 = $400.
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