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6.2 M&A Deals and Merger Models - Accretion/Dilution Calculations EXAM Questions With Correct Solutions $12.49
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6.2 M&A Deals and Merger Models - Accretion/Dilution Calculations EXAM Questions With Correct Solutions
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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,...

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  • September 19, 2024
  • 6
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • 62 ma deals and merger models accretiondiluti

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  • Wall Street Prep
  • Wall Street Prep

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K
C
LO
YC
D


6.2 M&A Deals and Merger Models -
U



Accretion/Dilution Calculations
ST




EXAM Questions With Correct
Solutions All Verified By An Expert
A+ Graded

, 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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