Mergers and Inquisitions: Merger Model Questions EXAM Questions With Correct Solutions All Verified By An Expert A+ Graded
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Course
Wall Street Prep
Institution
Wall Street Prep
Walk me through a basic merger model - ANS "A merger model is used to analyze the financial profiles of 2 companies, the purchase price and how the purchase is made, and determines whether the buyer's EPS increases or decreases.
Step 1 is making assumptions about the acquisition - the price an...
With Correct Solutions All Verified
By An Expert A+ Graded
, Walk me through a basic merger model - ANS "A merger model is used to analyze the
financial profiles of 2 companies, the purchase price and how the purchase is made,
and determines whether the buyer's EPS increases or decreases.
Step 1 is making assumptions about the acquisition - the price and whether it was cash,
stock or debt or some combination of those. Next, you determine the valuations and
shares outstanding of the buyer and seller and project out an income statement for each
one.
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Finally, you combine the incomes statements, adding up line items such as revenue and
operating expenses, and adjusting for Forgone Interest on Cash and Interest Paid on
C
Debt in the Combined Pre-Tax Income line: you apply the buyer's tax rate to get the
combine net income, and then divid by the new share count to determine the combined
EPS."
LO
What's the difference between a merger and an acquisition? - ANS There's always a
buyer and seller in any M&A deal - the difference between "merger" and "acquisition" is
more semantic than anything. In a merger the companies are close to the same size,
whereas in an acquisition the buyer is significantly larger.
YC
Why would a company want to acquire another company? - ANS Several Possible
reasons:
- The buyer wants to gain market share by buying a competitor.
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- The buyer needs to grow more quickly and sees an acquisition as a way to do that/
- The buyer believes the seller is undervalued.
- The buyer wants to acquire the seller's customers so it can u[-sell and cross-sell to
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them.
- The buyer thinks the seller has a critical technology, intellectual property or some other
ST
"secret sauce" it can use to significantly enhance its business.
- The buyer believes it can achieve significant synergies and therefore make the deal
accretive for it shareholders.
Why would an acquisition be dilutive? - ANS An acquisition is dilutive if the additional
amount of Net Income the seller contributes is not enough to offset the buyer's forgone
interest on cash, additional interest aid on debt, and the effects of issuing additional
shares.
Acquisition effects - such as amortization of intangibles - can also make an acquisition
dilutive.
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