M&A (Mergers & Acquisitions)

Question 1

Cost of cash (formula)

Answer 1

= Foregone Interest rate on Cash x (1 - Buyer Tax Rate)

*⁠ ⁠Buyer giving up interest on cash in future, can no longer earn interest on cash
*⁠ ⁠Pay taxes on interest income

Question 2

Cost of Debt (formula)

Answer 2

= Interest Rate on Date x (1 - Buyer Tax Rate)

*⁠ ⁠Interest on debt is tax deductible

Question 3

Cost of Equity (formula)

Answer 3

= Reciprocal of buyer’s P/E multiple

• ⁠Buyer’s after-tax yield

Question 4

⁠Yield of Seller (formula)

Answer 4

= Reciprocal of seller’s P/E multiple

*⁠For PE using purchase price, not current share price, so PE =
Net Income /Equity Purchase Price

Question 5

PF Net Income (formula)

Answer 5

= Combined Net Income - (Price Paid x % Debt x⁠ ⁠Interest on Debt x (1 - Buyer Tax Rate)) - (Price Paid x % Foregone Interest on Cash x (1 - Buyer Tax Rate))

Question 6

PF Equity (formula)

Answer 6

Buyer’s Equity Value + Value of New Shares

Question 7

PF Enterprise Value (formula)

Answer 7

Buyer’s Enterprise Value + Purchase
Enterprise Value of Seller

Question 8

⁠Deferred Tax Liabilities (formula)

Answer 8

= (PP&E - Fixed Asset Write Ups %
New Created Intangibles) x Buyer Tax rate