M&A Merger Models Review Questions
and Correct Answers
How can you think about calculating combined equity value? ✅if no Stock is used,
Combined Equity Value = Company A's Equity Value.
If it's a 100% Stock deal, Combined Equity Value = Company A's Equity Value +
Company B's Purchase Equity Value.
How can you think about calculating combined enterprise value? ✅Combined
Enterprise Value = Acquirer's Current Enterprise Value + Seller's Purchase Enterprise
Value
Equal to the Combined Equity Value, plus the Debt (and other Debt-like Liabilities),
minus the Cash (and other non-core-business Assets) of the Combined Company...
including the Cash or Debt used to fund the deal.
Where will combined multiples roughly end up? ✅The Combined Multiples will be in
between the Acquirer's multiples and Target's purchase multiples.
How does purchase method effect combined Enterprise Value-Based Multiples?
✅These will not change regardless of the purchase method because the Combined
Enterprise Value isn't affected by the purchase method, and neither are metrics like
Revenue, EBIT, or EBITDA.
Combined Equity Value-Based Multiples ✅These will change based on the purchase
method because the Combined Equity Value changes based on the amount of Stock
used, and the Combined Net Income changes based on the amount of Cash and Debt
used and the interest rates on them.
Walk me through a merger model ✅1.) project the financial statements of the
buyer/seller, 2.) estimate the purchase price and form of payment, 3.) create a sources
& uses schedule and purchase price allocation schedule, 4.) combine the balance sheet
of the buyer/seller, 5.) combine the income statements of the buyer/seller, 6.) calculate
cash flow, debt repayment, and key metrics/ratios, 7.) calculate EPS accretion/dilution
and create sensitivity tables
What are the key projections you need to make for merger model financial statements?
✅1.) Revenue, 2.) COGS/Opex, 3.) Net interest income, 4.) Taxes/net income, 5.)
major cash flow items (D&A, working capital, dividends)
What is the cost of cash? ✅Forgone cash interest * (1-buyer tax rate)
What is cost debt? ✅(interest expense/average debt balance or its the actual interest
rate on new debt) * (1-buyer tax rate)
, What is cost of equity? ✅Net income / equity value
Why would one company want to buy another company? ✅One company will want to
buy another company if it believes it will be better off after the acquisition takes place.
For example:
• The Seller's asking price is less than its Implied Value, i.e. the Present Value of its
future cash flows.
• The Buyer's expected IRR from the acquisition exceeds its WACC.
1.) Consolidation and economies of scale 2.) grow geographically or gain market share,
3.) acquire new customers/distribution channels, and 4.) expand products.
Deals are also motivated by competition, office politics, and ego.
Walk me through a merger model (accretion/dilution analysis). ✅In a merger model,
you start by projecting the financial statements of the Buyer and Seller. Then, you
estimate the Purchase Price and the mix of Cash, Debt, and Stock used to fund the
deal. You create a Sources & Uses schedule and Purchase Price Allocation schedule to
estimate the true cost of the acquisition and its effects.
Then, you combine the Balance Sheets of the Buyer and Seller, reflecting the Cash,
Debt, and Stock used, new Goodwill created, and any write-ups. You then combine the
Income Statements, reflecting the Foregone Interest on Cash, Interest on Debt, and
synergies. If Debt or Cash changes over time, your Interest figures should also change.
The Combined Net Income equals the Combined Pre-Tax Income times (1 - Buyer's
Tax Rate), and to get the Combined EPS, you divide that by the Buyer's Existing Share
Count + New Shares Issued in the Deal.
You calculate the accretion/dilution by taking the Combined EPS, dividing it by the
Buyer's standalone EPS, and subtracting 1.
Why might an M&A deal be accretive or dilutive? ✅A deal is accretive if the extra Pre-
Tax Income from a Seller exceeds the cost of the acquisition in the form of Foregone
Interest on Cash, Interest Paid on New Debt, and New Shares Issued.
How can you tell whether an M&A deal will be accretive or dilutive? ✅You compare the
Weighted Cost of Acquisition to the Seller's Yield at its purchase price. • Cost of Cash =
Foregone Interest Rate on Cash * (1 - Buyer's Tax Rate) • Cost of Debt = Interest Rate
on New Debt * (1 - Buyer's Tax Rate) • Cost of Stock = Reciprocal of the Buyer's P / E
multiple, i.e. Net Income / Equity Value. • Seller's Yield = Reciprocal of the Seller's P / E
multiple, calculated using the Purchase Equity Value. Weighted Cost of Acquisition = %
Cash Used * Cost of Cash + % Debt Used * Cost of Debt + % Stock Used * Cost of
Stock. If the Weighted Cost is less than the Seller's Yield, the deal will be accretive, if
the Weighted Cost is greater than the Seller's Yield, the deal will be dilutive.
Why do you focus so much on EPS in M&A deals? ✅Because it's the only easy-to-
calculate metric that also captures the FULL impact of the deal - the Foregone Interest
on Cash, Interest on New Debt, and New Shares Issued. Although metrics such as
and Correct Answers
How can you think about calculating combined equity value? ✅if no Stock is used,
Combined Equity Value = Company A's Equity Value.
If it's a 100% Stock deal, Combined Equity Value = Company A's Equity Value +
Company B's Purchase Equity Value.
How can you think about calculating combined enterprise value? ✅Combined
Enterprise Value = Acquirer's Current Enterprise Value + Seller's Purchase Enterprise
Value
Equal to the Combined Equity Value, plus the Debt (and other Debt-like Liabilities),
minus the Cash (and other non-core-business Assets) of the Combined Company...
including the Cash or Debt used to fund the deal.
Where will combined multiples roughly end up? ✅The Combined Multiples will be in
between the Acquirer's multiples and Target's purchase multiples.
How does purchase method effect combined Enterprise Value-Based Multiples?
✅These will not change regardless of the purchase method because the Combined
Enterprise Value isn't affected by the purchase method, and neither are metrics like
Revenue, EBIT, or EBITDA.
Combined Equity Value-Based Multiples ✅These will change based on the purchase
method because the Combined Equity Value changes based on the amount of Stock
used, and the Combined Net Income changes based on the amount of Cash and Debt
used and the interest rates on them.
Walk me through a merger model ✅1.) project the financial statements of the
buyer/seller, 2.) estimate the purchase price and form of payment, 3.) create a sources
& uses schedule and purchase price allocation schedule, 4.) combine the balance sheet
of the buyer/seller, 5.) combine the income statements of the buyer/seller, 6.) calculate
cash flow, debt repayment, and key metrics/ratios, 7.) calculate EPS accretion/dilution
and create sensitivity tables
What are the key projections you need to make for merger model financial statements?
✅1.) Revenue, 2.) COGS/Opex, 3.) Net interest income, 4.) Taxes/net income, 5.)
major cash flow items (D&A, working capital, dividends)
What is the cost of cash? ✅Forgone cash interest * (1-buyer tax rate)
What is cost debt? ✅(interest expense/average debt balance or its the actual interest
rate on new debt) * (1-buyer tax rate)
, What is cost of equity? ✅Net income / equity value
Why would one company want to buy another company? ✅One company will want to
buy another company if it believes it will be better off after the acquisition takes place.
For example:
• The Seller's asking price is less than its Implied Value, i.e. the Present Value of its
future cash flows.
• The Buyer's expected IRR from the acquisition exceeds its WACC.
1.) Consolidation and economies of scale 2.) grow geographically or gain market share,
3.) acquire new customers/distribution channels, and 4.) expand products.
Deals are also motivated by competition, office politics, and ego.
Walk me through a merger model (accretion/dilution analysis). ✅In a merger model,
you start by projecting the financial statements of the Buyer and Seller. Then, you
estimate the Purchase Price and the mix of Cash, Debt, and Stock used to fund the
deal. You create a Sources & Uses schedule and Purchase Price Allocation schedule to
estimate the true cost of the acquisition and its effects.
Then, you combine the Balance Sheets of the Buyer and Seller, reflecting the Cash,
Debt, and Stock used, new Goodwill created, and any write-ups. You then combine the
Income Statements, reflecting the Foregone Interest on Cash, Interest on Debt, and
synergies. If Debt or Cash changes over time, your Interest figures should also change.
The Combined Net Income equals the Combined Pre-Tax Income times (1 - Buyer's
Tax Rate), and to get the Combined EPS, you divide that by the Buyer's Existing Share
Count + New Shares Issued in the Deal.
You calculate the accretion/dilution by taking the Combined EPS, dividing it by the
Buyer's standalone EPS, and subtracting 1.
Why might an M&A deal be accretive or dilutive? ✅A deal is accretive if the extra Pre-
Tax Income from a Seller exceeds the cost of the acquisition in the form of Foregone
Interest on Cash, Interest Paid on New Debt, and New Shares Issued.
How can you tell whether an M&A deal will be accretive or dilutive? ✅You compare the
Weighted Cost of Acquisition to the Seller's Yield at its purchase price. • Cost of Cash =
Foregone Interest Rate on Cash * (1 - Buyer's Tax Rate) • Cost of Debt = Interest Rate
on New Debt * (1 - Buyer's Tax Rate) • Cost of Stock = Reciprocal of the Buyer's P / E
multiple, i.e. Net Income / Equity Value. • Seller's Yield = Reciprocal of the Seller's P / E
multiple, calculated using the Purchase Equity Value. Weighted Cost of Acquisition = %
Cash Used * Cost of Cash + % Debt Used * Cost of Debt + % Stock Used * Cost of
Stock. If the Weighted Cost is less than the Seller's Yield, the deal will be accretive, if
the Weighted Cost is greater than the Seller's Yield, the deal will be dilutive.
Why do you focus so much on EPS in M&A deals? ✅Because it's the only easy-to-
calculate metric that also captures the FULL impact of the deal - the Foregone Interest
on Cash, Interest on New Debt, and New Shares Issued. Although metrics such as
