M&A Deals and Merger Models EXAM Questions With Correct Solutions All Verified By An Expert A+ Graded
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Course
Wall Street Prep
Institution
Wall Street Prep
Financial reasons one company might acquire another? - ANS Economies of scale
Geographic expansion
Gain Market Share
Seller is Undervalued
Acquire Customers or Distribution Channels
Tax Reductions
Product Expansion/Diversification
"Fuzzy" reasons for M&A? - ANS IP/Patent/Key Tech
Def...
M&A Deals and Merger Models
EXAM Questions With Correct
Solutions All Verified By An Expert
A+ Graded
,Financial reasons one company might acquire another? - ANS Economies of scale
Geographic expansion
Gain Market Share
Seller is Undervalued
Acquire Customers or Distribution Channels
Tax Reductions
Product Expension/Diversification
K
"Fuzzy" reasons for M&A? - ANS IP/Patent/Key Tech
Defensive Acquisition
C
Acqui-Hire (hiring good teams)
Intangibles
Office politicis, ego, pride
LO
Advantages/Disadvantages of Cash - ANS Advantages: typically cheapest method
(interest earned on cash is typically low). Seller gets cash immediately so don't have to
deal with financing.
YC
Disadvantages: Seller gets taxed immediately and seller can't take advantage of
potential upside of buyer stock
Advantages/Disadvantages Debt - ANS Advant.:Cheaper than stock and seller gets
cash immediately
D
Disadvant.: Increased debt for company, financing can be expensive and time
consuming, Seller still gets taxed immediately, no upside of buyer stock for seller
U
Advantages/Disadvantages Stock - ANS Advant.: Can be cheaper if buyer has high
ST
stock price and P/E multiple, can be faster then debt financing, seller gets to participate
in potential upside of buyer's stock price, seller isn't taxed until stock is sold
Disadvant.: More risk for seller since buyer share price could change, there may be
lock-up periods for the stock and the seller might have to hold it for a long time before
selling, fixed shares vs. fixed value could make a big impact on seller if the buyer's
share price changes a lot.
Two ways of determining Cost of Equity in Merger Model? - ANS 1. Buyer Net
Income/Buyer Equity Value
, 2. the reciprocal of the Buyer's P/E multiple
Different than WACC because you are looking at Cost of Equity in terms of its impact on
the company's EPS, not the company's overall discount rate.
Weighted Cost of Acquisition Equation? - ANS = % Cash Used*After-Tax Cost of Cash
+ %Debt Used*After-Tax Cost of Debt + %Stock Used*After-Tax Cost of Stock
Seller's "Yield" Equation - ANS Net Income/Purchase Equity Price
K
The Yield is how much Net Income you get for each $1 spent on Company B's stock.
C
When is a deal accretive/dilutive/neutral based on Weighted Cost of Acquisition &
Seller's Yield? - ANS WCA < Yield: Accretive
LO
WCA = Yield: Neutral
WCA > Yield: Dilutive
When company A is paying less than what Company B is yielding then the deal is
YC
accretive.
When is a deal accretive/dilutive/neutral in a 100% stock deal? - ANS Buyer P/E >
Seller P/E at Purchase Price: Accretive
D
Buyer P/E = Seller's P/E at Purchase Price: Neutral
U
Buyer P/E < Seller's P/E at Purchase Price: Dilutive
When the Buyer is paying less than what the Seller is yielding, EPS will be boosted
ST
How do you calculate Forgone Interest on Cash? - ANS Cash used* interest rate
What tax rate should you use when calculating combined Net Income? - ANS the
buyer's because the seller becomes a subsidiary after it is purchased.
How do you calculate Accretion/Dilution? - ANS Subtract the Standalone EPS from the
Combined EPS and divide it by the Combined to get a %.
You can also subtract Standalone from Combined to get a $ value
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