M&A Model

Question 1

Basically, how to tell if accredditve vs dilutive

Answer 1

If pre tax income generated exceeds purchase price it will be accredditive

Question 2

Weighted Cost of Acquisition

When is it accreditive?

Answer 2

% Cash Used * Cost of Cash + % Debt Used * Cost of Debt + % Stock Used * Cost of Stock.

If the weighted cost of acquisition is less than sellers yield it is accreditive

Question 3

Cost of Cash

Answer 3

Foregone Interest Rate on Cash * (1 – Buyer’s Tax Rate)

Question 4

Cost of Debt

Answer 4

Interest Rate on New Debt * (1 – Buyer’s Tax Rate)

Question 5

Cost of Stock

Answer 5

Reciprocal of the Buyer’s P / E multiple, i.e. Net Income / Equity Value.

Question 6

Sellers Yield

Answer 6

Reciprocal of the Seller’s P / E multiple, calculated using the Purchase Equity Value.

Sellers Net Income / Purchase Equity Value

Question 7

in a 100% stock deal - If buyers EPS is 25 and Sellers is 15, is the deal accredtive

Answer 7

Only in 100% stock deal because cause of stock is 1/25 and sellers yield is 1/15