M&A Practice Test Questions and
Correct Answers
What's the difference between a "Merger" and an "Acquisition"? ✅In a merger, the
buyer and seller are about the same size, whereas in an acquisition the *buyer* is
significantly bigger (usually at least 2-3x bigger by revenue or market cap)
Walk me through a basic merger model ✅1. Determine the purchase price, purchase
method and other assumptions (deal fees, synergies, etc.)
2. Forecast the 3 statements for both buyer + seller
3. Calculate Goodwill and Allocate the Purchase Price
4. Combine the Balance Sheets and Adjust for Acquisition Effects
5. Combine the Income Statement and Adjust for Acquisition Effects
6. Calculate Accretion/Dilution and Create Sensitivity Tables
How do you determine the purchase price? ✅You do this the same way you value any
other company: use a combination of Public Comps, Precedent Transactions, and DCF
to come up with a price
How do you combine the Buyer and Sellers' Income Statements? ✅Add everything
together down to Pre-Tax Income, and multiply by the *buyer's* Tax Rate to get the
effective Net Income. Calculate a new EPS, accounting for any new shares issued
Calculating Goodwill: The buyer has $10,000 in Assets, $8,000 in Liabilities, and $2,000
in Shareholders' Equity. The seller has $1,000 in Assets, $800 in Liabilities, and $200 in
Shareholders' Equity. The buyer pays $500 for the seller, using 100% cash. What is the
value of each side on the Balance Sheet and how much Goodwill is created? ✅Assets
= $10,000 + $1,000 - $500 (cash from acquisition) = $10,500
Liabilities = $8,000 + $800 = $8,800
Shareholders' Equity = $2,000 (sellers' gets wiped out)
L + SE = $10,800
Goodwill Asset created = $300
What's the difference between Goodwill and Other Intangible Assets? ✅Goodwill
typically stays the same and only changes if there's Goodwill Impairment. Other
Intangible Assets are *Amortized* over several years and affect the Income Statement
by reducing Pre-Tax Income.
When combining the Balance Sheets, what adjustments for acquisition effects need to
be made for the ASSETS? ✅-Subtract any *Cash used* to acquire the seller
-Add/subtract Asset Write-Ups/Downs
, -Add Goodwill & Other Intangible Assets created, and remove any of the sellers' existing
amount
-Add any DTA's
What adjustments need to be made for Liabilities and Shareholder's Equity? ✅-Wipe
out the seller's Shareholders' Equity, add any new shares issued
-Add Debt used, subtract any *seller Debt paid off*
-Adjust any DTL's
What adjustments need to be made to the Income Statement? ✅-Foregone Interest on
cash used
-Revenue/Cost Synergies
-New D&A
-Interest Paid on new Debt
-Any increase in Shares Outstanding
A deal will generally be Dilutive if the amount of additional ______________ the buyer
receives isn't enough to to offset the cost of the debt, stock, or cash used in the
acquisition ✅Pre-Tax Income
Why would the buyer prefer to use 100% cash? ✅-Cheaper than debt
-Doesn't require them to give up stock
How would the buyer assess how much debt it can reasonably use? ✅Look at the % of
debt used in recent, similar deals, as well as what the company's *Leverage Ratio* will
be
Leverage Ratio = ✅Debt / EBITDA
How would the buyer assess how much stock it could be able to issue? ✅Look at how
much it's diluting existing shareholders and also *how high its current share price is*
(the higher the better!)
✅
All else equal, in a 100% stock deal, it will be *accretive* if the buyer has a ______ P/E
multiple than the seller ✅Higher
Is there a rule of thumb for calculating whether an acquisition will be Accretive? Does it
work all the time? ✅If the Weighed Cost of Cash, Debt, & Stock used in the deal <
*Yield of the Seller*
Nope - this doesn't take into account tax rates, acquisition effects, transaction fees,
synergies, etc.
Correct Answers
What's the difference between a "Merger" and an "Acquisition"? ✅In a merger, the
buyer and seller are about the same size, whereas in an acquisition the *buyer* is
significantly bigger (usually at least 2-3x bigger by revenue or market cap)
Walk me through a basic merger model ✅1. Determine the purchase price, purchase
method and other assumptions (deal fees, synergies, etc.)
2. Forecast the 3 statements for both buyer + seller
3. Calculate Goodwill and Allocate the Purchase Price
4. Combine the Balance Sheets and Adjust for Acquisition Effects
5. Combine the Income Statement and Adjust for Acquisition Effects
6. Calculate Accretion/Dilution and Create Sensitivity Tables
How do you determine the purchase price? ✅You do this the same way you value any
other company: use a combination of Public Comps, Precedent Transactions, and DCF
to come up with a price
How do you combine the Buyer and Sellers' Income Statements? ✅Add everything
together down to Pre-Tax Income, and multiply by the *buyer's* Tax Rate to get the
effective Net Income. Calculate a new EPS, accounting for any new shares issued
Calculating Goodwill: The buyer has $10,000 in Assets, $8,000 in Liabilities, and $2,000
in Shareholders' Equity. The seller has $1,000 in Assets, $800 in Liabilities, and $200 in
Shareholders' Equity. The buyer pays $500 for the seller, using 100% cash. What is the
value of each side on the Balance Sheet and how much Goodwill is created? ✅Assets
= $10,000 + $1,000 - $500 (cash from acquisition) = $10,500
Liabilities = $8,000 + $800 = $8,800
Shareholders' Equity = $2,000 (sellers' gets wiped out)
L + SE = $10,800
Goodwill Asset created = $300
What's the difference between Goodwill and Other Intangible Assets? ✅Goodwill
typically stays the same and only changes if there's Goodwill Impairment. Other
Intangible Assets are *Amortized* over several years and affect the Income Statement
by reducing Pre-Tax Income.
When combining the Balance Sheets, what adjustments for acquisition effects need to
be made for the ASSETS? ✅-Subtract any *Cash used* to acquire the seller
-Add/subtract Asset Write-Ups/Downs
, -Add Goodwill & Other Intangible Assets created, and remove any of the sellers' existing
amount
-Add any DTA's
What adjustments need to be made for Liabilities and Shareholder's Equity? ✅-Wipe
out the seller's Shareholders' Equity, add any new shares issued
-Add Debt used, subtract any *seller Debt paid off*
-Adjust any DTL's
What adjustments need to be made to the Income Statement? ✅-Foregone Interest on
cash used
-Revenue/Cost Synergies
-New D&A
-Interest Paid on new Debt
-Any increase in Shares Outstanding
A deal will generally be Dilutive if the amount of additional ______________ the buyer
receives isn't enough to to offset the cost of the debt, stock, or cash used in the
acquisition ✅Pre-Tax Income
Why would the buyer prefer to use 100% cash? ✅-Cheaper than debt
-Doesn't require them to give up stock
How would the buyer assess how much debt it can reasonably use? ✅Look at the % of
debt used in recent, similar deals, as well as what the company's *Leverage Ratio* will
be
Leverage Ratio = ✅Debt / EBITDA
How would the buyer assess how much stock it could be able to issue? ✅Look at how
much it's diluting existing shareholders and also *how high its current share price is*
(the higher the better!)
✅
All else equal, in a 100% stock deal, it will be *accretive* if the buyer has a ______ P/E
multiple than the seller ✅Higher
Is there a rule of thumb for calculating whether an acquisition will be Accretive? Does it
work all the time? ✅If the Weighed Cost of Cash, Debt, & Stock used in the deal <
*Yield of the Seller*
Nope - this doesn't take into account tax rates, acquisition effects, transaction fees,
synergies, etc.
