M&A/ Merger Model & LBO 2024/2025
Exam Questions Marking Scheme New
Update | A+ Rated
Walk me through a merger model. - 🧠ANSWER ✔✔"○ Used to analyze the
financial profiles of 2 companies, the purchase price and how the purchase
is made, and determines whether the buyer's EPS increases or decreases
○ 1) Make assumptions about acquisition (price / financing methods) ○ 2)
Determine Valuation / shares outstanding of buyer + seller and project out
IS for each party ○ 3) Combine IS, adding line items such as Revenue /
OpEx + adjusting for Foregone Interest on Cash and Interest Paid on Debt
in the Combined Pre-Tax Income line ○ 4) Apply buyer's tax rate to get
combined Net Income, then divide by new share count to determine
combined EPS"
What are the two types of buyers? - 🧠ANSWER ✔✔○ Financial buyers and
strategic buyers
"Why would a company buy another company? How would this reasoning
differ for the two types of buyers?" - 🧠ANSWER ✔✔"○ Several reasons ■
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
1
PRIVACY STATEMENT. ALL RIGHTS RESERVED
,Gain market share / grow quickly ■ Seller is undervalued ■ Acquire seller's
customers ■ Acquire key technology / IP from seller ■ Acquire talent from
seller ("acquihire") ■ Possibility of significant revenue / cost synergies ○
Generally, financial sponsors motivated more by returns / IRR versus
strategic buyers are willing to take larger bets / longer-term view on
potential success"
3 main financing methods and why use one over another? - 🧠ANSWER
✔✔"○ Stock, Cash and Debt ○ Assuming buyer has unlimited resources,
almost always prefers cash ■ Cheaper than debt (IR on cash < 5%
whereas IR on debt usually higher) ■ Cheaper than stock (most P /E
multiples are in 10-20x range, which equals a 5-10% "Cost of Stock") ■
Less risky than debt (no chance buyer may default) ■ Less risky than stock
(share price can plummet) ○ However, typically see a mix since it may be
saving cash for something else or its stock max be trading at an all-time
high (which would mean a higher P /E multiple and lower "Cost of Stock")"
"When would you prefer revenue synergies over cost synergies, and when
would you be indifferent? (think of the two types of revenue synergies)" -
🧠ANSWER ✔✔"○ If revenue synergies coming from cross-selling to new
customers, and thus selling MORE products, would prefer cost synergies ■
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
2
PRIVACY STATEMENT. ALL RIGHTS RESERVED
, Increase in units sold would come with an associated increase in COGS,
whereas cost synergies are realized in isolation ○ If revenue synergies
coming from selling same number of products at higher cost (e.g. no
associated increase in COGS), would be indifferent between revenue and
cost synergies"
Why do we look at EPS & accretion/dilution? - 🧠ANSWER ✔✔"○
Essentially because shareholders care about this metric ○ Can provide
"hard" or financial rationale in addition to more "fuzzy" reasons"
Difference between Mergers vs. Acquisitions? - 🧠ANSWER ✔✔"○ Merger:
companies are close to same size ○ Acquisition: buyer is significantly
larger"
What are the 5 main acquisition affects? - 🧠ANSWER ✔✔"○ Foregone
Interest on Cash (buyer loses interest income it would have otherwise
earned if it uses cash for the acquisition) ○ Additional Interest on Debt
(buyer pays additional interest expense if debt is used) ○ Additional Shares
Outstanding (if buyer pays w/ stock, must issue additional shares) ○
Combined Financial Statements (seller's financials are added to buyer's
post-acquisition) ○ Creation of Goodwill & Other Intangibles (BS items that
represent a "premium" paid to a company over it's "fair value")"
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
3
PRIVACY STATEMENT. ALL RIGHTS RESERVED
Exam Questions Marking Scheme New
Update | A+ Rated
Walk me through a merger model. - 🧠ANSWER ✔✔"○ Used to analyze the
financial profiles of 2 companies, the purchase price and how the purchase
is made, and determines whether the buyer's EPS increases or decreases
○ 1) Make assumptions about acquisition (price / financing methods) ○ 2)
Determine Valuation / shares outstanding of buyer + seller and project out
IS for each party ○ 3) Combine IS, adding line items such as Revenue /
OpEx + adjusting for Foregone Interest on Cash and Interest Paid on Debt
in the Combined Pre-Tax Income line ○ 4) Apply buyer's tax rate to get
combined Net Income, then divide by new share count to determine
combined EPS"
What are the two types of buyers? - 🧠ANSWER ✔✔○ Financial buyers and
strategic buyers
"Why would a company buy another company? How would this reasoning
differ for the two types of buyers?" - 🧠ANSWER ✔✔"○ Several reasons ■
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
1
PRIVACY STATEMENT. ALL RIGHTS RESERVED
,Gain market share / grow quickly ■ Seller is undervalued ■ Acquire seller's
customers ■ Acquire key technology / IP from seller ■ Acquire talent from
seller ("acquihire") ■ Possibility of significant revenue / cost synergies ○
Generally, financial sponsors motivated more by returns / IRR versus
strategic buyers are willing to take larger bets / longer-term view on
potential success"
3 main financing methods and why use one over another? - 🧠ANSWER
✔✔"○ Stock, Cash and Debt ○ Assuming buyer has unlimited resources,
almost always prefers cash ■ Cheaper than debt (IR on cash < 5%
whereas IR on debt usually higher) ■ Cheaper than stock (most P /E
multiples are in 10-20x range, which equals a 5-10% "Cost of Stock") ■
Less risky than debt (no chance buyer may default) ■ Less risky than stock
(share price can plummet) ○ However, typically see a mix since it may be
saving cash for something else or its stock max be trading at an all-time
high (which would mean a higher P /E multiple and lower "Cost of Stock")"
"When would you prefer revenue synergies over cost synergies, and when
would you be indifferent? (think of the two types of revenue synergies)" -
🧠ANSWER ✔✔"○ If revenue synergies coming from cross-selling to new
customers, and thus selling MORE products, would prefer cost synergies ■
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
2
PRIVACY STATEMENT. ALL RIGHTS RESERVED
, Increase in units sold would come with an associated increase in COGS,
whereas cost synergies are realized in isolation ○ If revenue synergies
coming from selling same number of products at higher cost (e.g. no
associated increase in COGS), would be indifferent between revenue and
cost synergies"
Why do we look at EPS & accretion/dilution? - 🧠ANSWER ✔✔"○
Essentially because shareholders care about this metric ○ Can provide
"hard" or financial rationale in addition to more "fuzzy" reasons"
Difference between Mergers vs. Acquisitions? - 🧠ANSWER ✔✔"○ Merger:
companies are close to same size ○ Acquisition: buyer is significantly
larger"
What are the 5 main acquisition affects? - 🧠ANSWER ✔✔"○ Foregone
Interest on Cash (buyer loses interest income it would have otherwise
earned if it uses cash for the acquisition) ○ Additional Interest on Debt
(buyer pays additional interest expense if debt is used) ○ Additional Shares
Outstanding (if buyer pays w/ stock, must issue additional shares) ○
Combined Financial Statements (seller's financials are added to buyer's
post-acquisition) ○ Creation of Goodwill & Other Intangibles (BS items that
represent a "premium" paid to a company over it's "fair value")"
COPYRIGHT©PROFFKERRYMARTIN 2025/2026. YEAR PUBLISHED 2025. COMPANY REGISTRATION NUMBER: 619652435. TERMS OF USE.
3
PRIVACY STATEMENT. ALL RIGHTS RESERVED
