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M&A Modeling Questions and Answers
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What is an accretive deal in an all-stock transaction? [ Ans: ] An
accretive deal in an all-stock transaction occurs when the
earnings per share (EPS) of the acquiring company increases after
the merger. This typically happens when the acquiring company's
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price-to-earnings (P/E) ratio is higher than that of the target
company, allowing the combined entity to generate more
earnings per share than the acquirer had prior to the deal.
Accretive deals are generally viewed favorably by investors as
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they indicate that the acquisition is expected to enhance
shareholder value.
How do you determine whether an all-stock deal is accretive or
dilutive? [ Ans: ] In an all-stock deal, the accretion or dilution is
determined by comparing the pro forma earnings per share (EPS)
of the combined company to the standalone EPS of the acquiring
company. If the combined EPS is greater than the pre-deal
acquirer, the deal is accretive. A simple formula calculates this for
all-stock deals by comparing the price-to-earnings (P/E) ratios of
the acquiring and target companies. If the acquirer's P/E ratio is
higher than the target's P/E ratio, the transaction is accretive,
meaning the acquirer's EPS will increase. Conversely, if the
acquirer's P/E ratio is lower than the target's, the deal is dilutive,
resulting in a decrease in the acquirer's EPS.
How does the relative size of the acquirer's and target's net
income affect accretion/dilution in an all-stock deal? [ Ans: ] In
an all-stock deal, the relative size of the acquirer's and target's net
income affects accretion or dilution based on the proportion of
new shares issued. If the target's net income is smaller relative to
, 2
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the acquirer's, the deal is more likely to be accretive because the
additional earnings outweigh the dilution. Conversely, if the
target's net income is larger, the deal can be dilutive if the
acquirer issues a significant number of shares, reducing EPS.
What assumptions need to be made about synergies in an
accretion/dilution analysis? [ Ans: ] In an accretion/dilution
analysis, assumptions about synergies typically include estimating
the amount of cost synergies (savings from eliminating
redundancies), revenue synergies (additional revenue from
expanded market access or cross-selling), and the timing of when
these synergies will be realized. Additionally, assumptions are
made about one-time integration costs required to achieve the
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synergies. These assumptions impact the combined net income
and cash flow, which ultimately affect whether the deal is
accretive or dilutive to the acquirer's EPS.
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Why is it important to include cost synergies when evaluating an
all-stock transaction? [ Ans: ] Because cost synergies directly
impact the combined entity's net income and, consequently, the
earnings per share (EPS) of the merged company. In an all-stock
deal, accretion or dilution is driven by how much additional
earnings are generated relative to the number of new shares
issued. Cost synergies, such as operational efficiencies or expense
reductions, enhance net income, increasing the likelihood of an
accretive deal.
What are the key steps to perform an accretion/dilution analysis?
[ Ans: ] Start by projecting the acquirer and target standalone
finanicials. Then estimate the deal mechanics, including the
purchase price, payment structure, and any other financing. Next,
adjust for synergies and deal costs. Then, calculate the pro forma
net income and adjust the buyers share count to include new
shares issued, if any. Finally, divde the pro forma net income by
the pro forma share count to determine the combined EPS and
compare to the standalone EPS to see if the deal is accretive or
dilutive.
, 3
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Why does an increase in the acquirer's share price make an all-
stock deal more likely to be accretive? [ Ans: ] An increase in
the acquirer's share price makes an all-stock deal more likely to be
accretive because the acquirer can use fewer of its shares to pay
for the target company, reducing dilution. When the acquirer's
share price rises, the value of each share increases, meaning the
acquirer needs to issue fewer shares to fund the acquisition. As a
result, the combined earnings per share (EPS) are less diluted, and
if the synergies from the deal are strong enough, the transaction
can become accretive, increasing the acquirer's EPS post-
transaction.
How do you calculate the pro forma EPS in an all-stock deal? [
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Ans: ] Combine Net Incomes: Add the acquirer's and target's net
incomes to get the combined net income. Calculate the New
Share Count: Add the acquirer's existing shares to the new shares
issued to pay for the target. New shares issued = (Offer Price ×
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Target Shares) ÷ Acquirer's Share Price. Divide Combined Net
Income by New Share Count: Pro forma EPS = Combined Net
Income ÷ New Total Shares Outstanding. Key Takeaway: Pro forma
EPS shows the earnings per share for the combined company after
the deal, helping assess whether the deal is accretive or dilutive.
How does the issuance of new shares in an all-stock deal impact
existing shareholders of the acquirer? [ Ans: ] Dilution: New
shares issued to pay for the target reduce existing shareholders'
percentage ownership in the combined company. EPS Impact: If
the deal is accretive (pro forma EPS > acquirer's standalone EPS),
the dilution is offset by higher earnings per share, which benefits
shareholders. If the deal is dilutive (pro forma EPS < acquirer's
standalone EPS), shareholders may see a negative impact. Value
Creation: The actual impact depends on whether the deal
creates enough synergies or strategic value to outweigh the
dilution. Key Takeaway: Issuing new shares dilutes existing
shareholders, but the overall impact depends on whether the
deal increases or decreases shareholder value through EPS
changes and synergies.
, 4
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Why might an all-stock deal still be pursued even if it is dilutive in
the short term? [ Ans: ] Long-Term Strategic Benefits: The deal
might offer significant synergies, such as cost savings or revenue
growth, that create value over time, offsetting the initial dilution.
Preserving Cash: Using stock instead of cash allows the acquirer to
preserve liquidity for other investments or operational needs.
Shared Risk: In an all-stock deal, both parties share the risks and
rewards of the combined entity, aligning interests between the
acquirer and the target. Market Conditions: If the acquirer's stock
is highly valued, issuing shares may be a less costly way to fund the
deal compared to taking on expensive debt or using cash. Key
Takeaway: Even with short-term EPS dilution, an all-stock deal can
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make sense if it delivers long-term value, preserves cash, and
strategically benefits both companies.
How does the deal structure (e.g., stock-only, cash-only, or mixed)
affect accretion/dilution? [ Ans: ] The deal structure significantly
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affects accretion/dilution. In a stock-only deal, the acquirer issues
new shares to the target's shareholders, which dilutes the
acquirer's existing shareholders. If the combined company's EPS
increases due to synergies or higher earnings, the deal can be
accretive. In a cash-only deal, the acquirer uses its own cash to
pay for the target, which does not dilute its shareholders, but it
may reduce the acquirer's cash reserves or increase debt,
potentially affecting future earnings and the ability to invest.
Mixed deals, combining both stock and cash, balance the
benefits and drawbacks of both structures. Stock dilution is
partially offset by cash's immediate impact, but the overall effect
on accretion/dilution depends on how the mix influences the
acquirer's EPS and the cost of the transaction. Generally, cash
deals are less likely to be dilutive but might impact liquidity, while
stock deals carry more dilution risk but can be more flexible
financially.
Why might a company with a lower P/E ratio want to avoid an all-
stock deal? [ Ans: ] Relative Valuation Impact: In an all-stock
deal, shares are issued based on the acquirer's P/E ratio. If the
acquirer has a lower P/E than the target, it effectively values the
For Expert help and assignment solutions, +254707240657
M&A Modeling Questions and Answers
(100% Correct Answers) Already Graded
A+
What is an accretive deal in an all-stock transaction? [ Ans: ] An
accretive deal in an all-stock transaction occurs when the
earnings per share (EPS) of the acquiring company increases after
the merger. This typically happens when the acquiring company's
© 2025 Assignment Expert
price-to-earnings (P/E) ratio is higher than that of the target
company, allowing the combined entity to generate more
earnings per share than the acquirer had prior to the deal.
Accretive deals are generally viewed favorably by investors as
Guru01 - Stuvia
they indicate that the acquisition is expected to enhance
shareholder value.
How do you determine whether an all-stock deal is accretive or
dilutive? [ Ans: ] In an all-stock deal, the accretion or dilution is
determined by comparing the pro forma earnings per share (EPS)
of the combined company to the standalone EPS of the acquiring
company. If the combined EPS is greater than the pre-deal
acquirer, the deal is accretive. A simple formula calculates this for
all-stock deals by comparing the price-to-earnings (P/E) ratios of
the acquiring and target companies. If the acquirer's P/E ratio is
higher than the target's P/E ratio, the transaction is accretive,
meaning the acquirer's EPS will increase. Conversely, if the
acquirer's P/E ratio is lower than the target's, the deal is dilutive,
resulting in a decrease in the acquirer's EPS.
How does the relative size of the acquirer's and target's net
income affect accretion/dilution in an all-stock deal? [ Ans: ] In
an all-stock deal, the relative size of the acquirer's and target's net
income affects accretion or dilution based on the proportion of
new shares issued. If the target's net income is smaller relative to
, 2
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the acquirer's, the deal is more likely to be accretive because the
additional earnings outweigh the dilution. Conversely, if the
target's net income is larger, the deal can be dilutive if the
acquirer issues a significant number of shares, reducing EPS.
What assumptions need to be made about synergies in an
accretion/dilution analysis? [ Ans: ] In an accretion/dilution
analysis, assumptions about synergies typically include estimating
the amount of cost synergies (savings from eliminating
redundancies), revenue synergies (additional revenue from
expanded market access or cross-selling), and the timing of when
these synergies will be realized. Additionally, assumptions are
made about one-time integration costs required to achieve the
© 2025 Assignment Expert
synergies. These assumptions impact the combined net income
and cash flow, which ultimately affect whether the deal is
accretive or dilutive to the acquirer's EPS.
Guru01 - Stuvia
Why is it important to include cost synergies when evaluating an
all-stock transaction? [ Ans: ] Because cost synergies directly
impact the combined entity's net income and, consequently, the
earnings per share (EPS) of the merged company. In an all-stock
deal, accretion or dilution is driven by how much additional
earnings are generated relative to the number of new shares
issued. Cost synergies, such as operational efficiencies or expense
reductions, enhance net income, increasing the likelihood of an
accretive deal.
What are the key steps to perform an accretion/dilution analysis?
[ Ans: ] Start by projecting the acquirer and target standalone
finanicials. Then estimate the deal mechanics, including the
purchase price, payment structure, and any other financing. Next,
adjust for synergies and deal costs. Then, calculate the pro forma
net income and adjust the buyers share count to include new
shares issued, if any. Finally, divde the pro forma net income by
the pro forma share count to determine the combined EPS and
compare to the standalone EPS to see if the deal is accretive or
dilutive.
, 3
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Why does an increase in the acquirer's share price make an all-
stock deal more likely to be accretive? [ Ans: ] An increase in
the acquirer's share price makes an all-stock deal more likely to be
accretive because the acquirer can use fewer of its shares to pay
for the target company, reducing dilution. When the acquirer's
share price rises, the value of each share increases, meaning the
acquirer needs to issue fewer shares to fund the acquisition. As a
result, the combined earnings per share (EPS) are less diluted, and
if the synergies from the deal are strong enough, the transaction
can become accretive, increasing the acquirer's EPS post-
transaction.
How do you calculate the pro forma EPS in an all-stock deal? [
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Ans: ] Combine Net Incomes: Add the acquirer's and target's net
incomes to get the combined net income. Calculate the New
Share Count: Add the acquirer's existing shares to the new shares
issued to pay for the target. New shares issued = (Offer Price ×
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Target Shares) ÷ Acquirer's Share Price. Divide Combined Net
Income by New Share Count: Pro forma EPS = Combined Net
Income ÷ New Total Shares Outstanding. Key Takeaway: Pro forma
EPS shows the earnings per share for the combined company after
the deal, helping assess whether the deal is accretive or dilutive.
How does the issuance of new shares in an all-stock deal impact
existing shareholders of the acquirer? [ Ans: ] Dilution: New
shares issued to pay for the target reduce existing shareholders'
percentage ownership in the combined company. EPS Impact: If
the deal is accretive (pro forma EPS > acquirer's standalone EPS),
the dilution is offset by higher earnings per share, which benefits
shareholders. If the deal is dilutive (pro forma EPS < acquirer's
standalone EPS), shareholders may see a negative impact. Value
Creation: The actual impact depends on whether the deal
creates enough synergies or strategic value to outweigh the
dilution. Key Takeaway: Issuing new shares dilutes existing
shareholders, but the overall impact depends on whether the
deal increases or decreases shareholder value through EPS
changes and synergies.
, 4
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Why might an all-stock deal still be pursued even if it is dilutive in
the short term? [ Ans: ] Long-Term Strategic Benefits: The deal
might offer significant synergies, such as cost savings or revenue
growth, that create value over time, offsetting the initial dilution.
Preserving Cash: Using stock instead of cash allows the acquirer to
preserve liquidity for other investments or operational needs.
Shared Risk: In an all-stock deal, both parties share the risks and
rewards of the combined entity, aligning interests between the
acquirer and the target. Market Conditions: If the acquirer's stock
is highly valued, issuing shares may be a less costly way to fund the
deal compared to taking on expensive debt or using cash. Key
Takeaway: Even with short-term EPS dilution, an all-stock deal can
© 2025 Assignment Expert
make sense if it delivers long-term value, preserves cash, and
strategically benefits both companies.
How does the deal structure (e.g., stock-only, cash-only, or mixed)
affect accretion/dilution? [ Ans: ] The deal structure significantly
Guru01 - Stuvia
affects accretion/dilution. In a stock-only deal, the acquirer issues
new shares to the target's shareholders, which dilutes the
acquirer's existing shareholders. If the combined company's EPS
increases due to synergies or higher earnings, the deal can be
accretive. In a cash-only deal, the acquirer uses its own cash to
pay for the target, which does not dilute its shareholders, but it
may reduce the acquirer's cash reserves or increase debt,
potentially affecting future earnings and the ability to invest.
Mixed deals, combining both stock and cash, balance the
benefits and drawbacks of both structures. Stock dilution is
partially offset by cash's immediate impact, but the overall effect
on accretion/dilution depends on how the mix influences the
acquirer's EPS and the cost of the transaction. Generally, cash
deals are less likely to be dilutive but might impact liquidity, while
stock deals carry more dilution risk but can be more flexible
financially.
Why might a company with a lower P/E ratio want to avoid an all-
stock deal? [ Ans: ] Relative Valuation Impact: In an all-stock
deal, shares are issued based on the acquirer's P/E ratio. If the
acquirer has a lower P/E than the target, it effectively values the
