M&A Modeling Exam Questions and
Answers Latest Versions 2025 Graded
A+
What is an accretive deal in an all-stock transaction?
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 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 they indicate that the acquisition
is expected to enhance shareholder value.
How do you determine whether an all-stock deal is accretive or dilutive?
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?
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 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?
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 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.
Why is it important to include cost synergies when evaluating an all-stock transaction?
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?
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.
Why does an increase in the acquirer's share price make an all-stock deal more likely to be
accretive?
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?
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
Answers Latest Versions 2025 Graded
A+
What is an accretive deal in an all-stock transaction?
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 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 they indicate that the acquisition
is expected to enhance shareholder value.
How do you determine whether an all-stock deal is accretive or dilutive?
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?
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 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?
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 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.
Why is it important to include cost synergies when evaluating an all-stock transaction?
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?
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.
Why does an increase in the acquirer's share price make an all-stock deal more likely to be
accretive?
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?
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
