Acc/Dil & Share Price

Question 1

What's the Share Price?
 Revenue = $1,000
 Gross Margin = 50%
 SG&A (incl. D&A) = $100
 Total Debt on BS = $1,000
 Cash = $500
 Interest Exp. = 10% per annum
 Tax Rate = 50%
 P/E = 20x
 EV/EBITDA = 10x
 Shares = 100 outstanding

Answer 1

 Revenue = $1,000
 Gross Margin = 50%
 SG&A (incl. D&A) = $100
 Total Debt on BS = $1,000
 Cash = $500
 Interest Exp. = 10% per annum
 Tax Rate = 50%
 P/E = 20x
 EV/EBITDA = 10x
 Shares = 100 outstanding

Question 2

Acc/Dil
o Buyer
 Net Income: $1,000
 Market Cap: $10,000
 Share Price: $10
 Shares: 1,000
o Seller:
 Net Income: $5,000
 Market Cap: $20,000
 Share Price: $20
 Shares: 1,000

Answer 2

Answer:
 Seller Market Cap / Buyer Share Price = # of shares buyer must issue
 $20,000 / $10 = 2,000
 New buyer share count
 2,000 + 1,000 = 3,000
 Combined earnings / new share count = PF EPS
 ($1,000 + $5,000) / 3,000 = $6,000 / 3,000 = $2
 Pre-transaction Buyer EPS
 $1,000 / 1,000 = $1
 Accretive by $1

Question 3

Acc/Dil
o Company A
 Market Cap: $1,000
 Net Income: $100
 Shares: 100
o Company B
 Market Cap: $2,000
 Net Income: $200
 Shares: 200
o Pre-tax Synergies: $100; tax rate of 40%

Answer 3

Answer:
 Company A:
 Share Price: $10
 P/E: 10x
 EPS: $1
 Company B:
 Share Price: $10
 P/E: 10x
 EPS: $1
o Combined NI: $100 + $200 + $60 = $360
o Shares Issued: $2,000 seller market cap / $10 buyer share price = 200
o New PF shares: 100 + 200
o PF EPS: $360 / 300 = $1.20
o Pre-transaction EPS: $1 vs. PF EPS $1.20 (accretive by $.20)

Question 4

Company acquires Company B
Company A has a PE of 15x
Company B has a PE of 20x
it’s an all stock deal. Is it accrettive or dilutive?

Answer 4

It’s dilutive. Company A’s equity is yielding 6.7% while Company B’s equity is yielding 5%. In an all stock deal you’re purchasing a lower yielding asset with a higher yielding asset (your own equity).