M&A Deals and Merger Models -
Accretion/Dilution Calculation Questions
and Correct Answers
1. Company A, with a P / E of 25x, acquires Company B for a purchase P / E multiple of
15x. Will the deal be accretive? ✅You can't tell unless you know that it's a 100% Stock
deal.
If it is a 100% Stock deal, then it will be accretive because the Buyer's P / E is higher
than the Seller's, indicating that the Buyer's Cost of Acquisition (, or 4%) is less
than the Seller's Yield (, or 6.7%).
2. Walk me through the full math for the deal now.
Assume that Company A has 10 shares outstanding at a share price of $25.00, and its
Net Income is $10.
It acquires Company B for a Purchase Equity Value of $150. Company B has a Net
Income of $10 as well. Assume the same tax rates for both companies. How accretive is
this deal? ✅Company A's EPS is $ = $1.00.
To do the deal, Company A must issue 6 new shares since $150 / $25.00 = 6, so the
Combined Share Count is 10 + 6 = 16.
Since no Cash or Debt were used and the tax rates are the same, the Combined Net
Income = Company A Net Income + Company B Net Income = $10 + $10 = $20.
The Combined EPS, therefore, is $ = $1.25, so there's 25% accretion.
3. Company A now uses Debt with an Interest Rate of 10% to acquire Company B. Is
the deal still accretive? At what interest rate does it change from accretive to dilutive?
✅The Weighted Cost of Acquisition would be 10% * (1 - 20%), or 8%, so the deal
would not be accretive because that Cost is greater than the Seller's Yield of 6.7%.
For the deal to turn accretive, the After-Tax Cost of Debt would have to be below 6.7%.
Since 6.7% / (1 - 20%) = 8.5%, the deal would turn accretive at an interest rate below
8.5%.
4. What are the Combined Equity Value and Enterprise Value in this deal?
, Assume the original 100% Stock structure, and that Equity Value = Enterprise Value for
both the Buyer and Seller. ✅Combined Equity Value = Buyer's Equity Value + Value of
Stock Issued in the Deal = $250 + $150 = $400.
Combined Enterprise Value = Buyer's Enterprise Value + Purchase Enterprise Value of
Seller = $250 + $150 = $400.
5. How do the Combined EV / EBITDA and P / E multiples change if the purchase
method changes? ✅The Combined EV / EBITDA stays the same regardless of the
purchase method, but the Combined P / E multiple will change based on the Stock
issued and the Cash and Debt used since those affect the Combined Net Income.
6. Without doing any math, what range would you expect for the Combined P / E
multiple? ✅The Combined P / E multiple should be in between the Buyer's P / E
multiple and the Seller's Purchase P / E multiple, so between 25x and 15x here.
If Company A is much larger than Company B, the Combined P / E multiple will be
closer to the 25x of Company A. But if they're closer in size, the Combined P / E
multiple will be in the middle of this range.
You cannot average the P / E multiples of both companies because they may be
different sizes; a weighted average also won't work because the purchase method
affects the combined multiple.
7. Now assume that Company A is twice as big financially, so its Equity Value is $500
and its Net Income is $20. Will a 100% Stock deal be more or less accretive? ✅The
deal will be less accretive. The intuition is that the company that is not making the deal
dilutive - the Buyer - now has a higher weighting in all the calculations.
Since Company A's P / E is the same, but Company A is significantly bigger, its lower
Yield "drags down" the Combined EPS for the entire company.
The Combined P / E multiple will still be between 15x and 25x, but it will be closer to
25x because Company A is weighted more heavily.
8. Now do the math. What is the accretion/dilution in a 100% Stock deal? ✅The Buyer
previously represented $250 / $400, or 63%, of the total company, but now it represents
$500 / $650, or 77%, of the total company, so we'd expect the accretion to fall by
around 10-15%.
Company A's share price is now $50.00, it still has 10 shares outstanding, and its Equity
Value is $500. Its EPS is $ = $2.00.
To acquire Company B, Company A must issue 3 additional shares since $150 / $50.00
= 3.
Accretion/Dilution Calculation Questions
and Correct Answers
1. Company A, with a P / E of 25x, acquires Company B for a purchase P / E multiple of
15x. Will the deal be accretive? ✅You can't tell unless you know that it's a 100% Stock
deal.
If it is a 100% Stock deal, then it will be accretive because the Buyer's P / E is higher
than the Seller's, indicating that the Buyer's Cost of Acquisition (, or 4%) is less
than the Seller's Yield (, or 6.7%).
2. Walk me through the full math for the deal now.
Assume that Company A has 10 shares outstanding at a share price of $25.00, and its
Net Income is $10.
It acquires Company B for a Purchase Equity Value of $150. Company B has a Net
Income of $10 as well. Assume the same tax rates for both companies. How accretive is
this deal? ✅Company A's EPS is $ = $1.00.
To do the deal, Company A must issue 6 new shares since $150 / $25.00 = 6, so the
Combined Share Count is 10 + 6 = 16.
Since no Cash or Debt were used and the tax rates are the same, the Combined Net
Income = Company A Net Income + Company B Net Income = $10 + $10 = $20.
The Combined EPS, therefore, is $ = $1.25, so there's 25% accretion.
3. Company A now uses Debt with an Interest Rate of 10% to acquire Company B. Is
the deal still accretive? At what interest rate does it change from accretive to dilutive?
✅The Weighted Cost of Acquisition would be 10% * (1 - 20%), or 8%, so the deal
would not be accretive because that Cost is greater than the Seller's Yield of 6.7%.
For the deal to turn accretive, the After-Tax Cost of Debt would have to be below 6.7%.
Since 6.7% / (1 - 20%) = 8.5%, the deal would turn accretive at an interest rate below
8.5%.
4. What are the Combined Equity Value and Enterprise Value in this deal?
, Assume the original 100% Stock structure, and that Equity Value = Enterprise Value for
both the Buyer and Seller. ✅Combined Equity Value = Buyer's Equity Value + Value of
Stock Issued in the Deal = $250 + $150 = $400.
Combined Enterprise Value = Buyer's Enterprise Value + Purchase Enterprise Value of
Seller = $250 + $150 = $400.
5. How do the Combined EV / EBITDA and P / E multiples change if the purchase
method changes? ✅The Combined EV / EBITDA stays the same regardless of the
purchase method, but the Combined P / E multiple will change based on the Stock
issued and the Cash and Debt used since those affect the Combined Net Income.
6. Without doing any math, what range would you expect for the Combined P / E
multiple? ✅The Combined P / E multiple should be in between the Buyer's P / E
multiple and the Seller's Purchase P / E multiple, so between 25x and 15x here.
If Company A is much larger than Company B, the Combined P / E multiple will be
closer to the 25x of Company A. But if they're closer in size, the Combined P / E
multiple will be in the middle of this range.
You cannot average the P / E multiples of both companies because they may be
different sizes; a weighted average also won't work because the purchase method
affects the combined multiple.
7. Now assume that Company A is twice as big financially, so its Equity Value is $500
and its Net Income is $20. Will a 100% Stock deal be more or less accretive? ✅The
deal will be less accretive. The intuition is that the company that is not making the deal
dilutive - the Buyer - now has a higher weighting in all the calculations.
Since Company A's P / E is the same, but Company A is significantly bigger, its lower
Yield "drags down" the Combined EPS for the entire company.
The Combined P / E multiple will still be between 15x and 25x, but it will be closer to
25x because Company A is weighted more heavily.
8. Now do the math. What is the accretion/dilution in a 100% Stock deal? ✅The Buyer
previously represented $250 / $400, or 63%, of the total company, but now it represents
$500 / $650, or 77%, of the total company, so we'd expect the accretion to fall by
around 10-15%.
Company A's share price is now $50.00, it still has 10 shares outstanding, and its Equity
Value is $500. Its EPS is $ = $2.00.
To acquire Company B, Company A must issue 3 additional shares since $150 / $50.00
= 3.
