M&A MODELING EXAM ANSWERS FROM
WALL STREET PREP EXAM SCRIPT 2026
FULL SOLUTIONS AND CORRECT ANSWERS
GRADED A+
⩥ How can you analyze an M&A deal and determine whether or not it
makes sense? Answer: When analyzing a merger, you want to think
about it both quantitatively and qualitatively. First, did the acquisition
result in the expansion of geographies, products, customer base or
distribution channels. Did it result in additional intellectual property? On
the quantitative side, did the deal produce an IRR that exceeded the
WACC? Did the deal increase EPS?
⩥ Walk me through a merger model (accretion/dilution analysis).
Answer: 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? Answer: A deal will
be accretive if the cost of acquisition is less than the seller's yield OR in
absolute terms, if the pre-tax income from a seller exceeds that cost of
acquisition.
⩥ How can you tell whether an M&A deal will be accretive or dilutive?
Answer: 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? Answer: EPS is
the only metric that captures the full impact of the deal, including the
, foregone interest rate on cash, the additional interest rate on issued debt,
and the additional shares issued.
⩥ How do you determine the Purchase Price in an M&A deal? Answer:
Well it depends on whether the company is public or private. if the
company is PUBLIC, you assume that the purchase price will equal a
premium over the current share price. If the company is PRIVATE, you
use standard valuation methodologies.
⩥ What are the advantages and disadvantages of each purchase method
(Cash, Debt, and Stock) in M&A deals? Answer: Cash is usually the
cheapest option because foregone interest rates on cash are typically 1-
3%. However, Cash is taxed immediately. Debt is more expensive than
cash, less expensive than stock. This is because interest rates on debt is
higher than foregone interest on cash, but it is tax deductible and less
risky. Stock will typically be the most expensive purchase method
because it involves giving up ownership, however if the PE multiple is
high, then it may be a cheaper option. Additionally, when you pay in
stock, the seller has a stake in the success of the deal and it will not pay
out taxes immediately.
⩥ How does an Acquirer determine the mix of Cash, Debt, and Stock to
use in a deal? Answer: Since cash is usually the cheapest option, you
might assume that the seller will MAX out cash while still preserving
the minimum cash balance. Then might max out debt while still
preserving the debt/ebitda and ebitda/interest ratios. Then, if more
funding is needed, the remaining will be funded by stock
WALL STREET PREP EXAM SCRIPT 2026
FULL SOLUTIONS AND CORRECT ANSWERS
GRADED A+
⩥ How can you analyze an M&A deal and determine whether or not it
makes sense? Answer: When analyzing a merger, you want to think
about it both quantitatively and qualitatively. First, did the acquisition
result in the expansion of geographies, products, customer base or
distribution channels. Did it result in additional intellectual property? On
the quantitative side, did the deal produce an IRR that exceeded the
WACC? Did the deal increase EPS?
⩥ Walk me through a merger model (accretion/dilution analysis).
Answer: 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? Answer: A deal will
be accretive if the cost of acquisition is less than the seller's yield OR in
absolute terms, if the pre-tax income from a seller exceeds that cost of
acquisition.
⩥ How can you tell whether an M&A deal will be accretive or dilutive?
Answer: 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? Answer: EPS is
the only metric that captures the full impact of the deal, including the
, foregone interest rate on cash, the additional interest rate on issued debt,
and the additional shares issued.
⩥ How do you determine the Purchase Price in an M&A deal? Answer:
Well it depends on whether the company is public or private. if the
company is PUBLIC, you assume that the purchase price will equal a
premium over the current share price. If the company is PRIVATE, you
use standard valuation methodologies.
⩥ What are the advantages and disadvantages of each purchase method
(Cash, Debt, and Stock) in M&A deals? Answer: Cash is usually the
cheapest option because foregone interest rates on cash are typically 1-
3%. However, Cash is taxed immediately. Debt is more expensive than
cash, less expensive than stock. This is because interest rates on debt is
higher than foregone interest on cash, but it is tax deductible and less
risky. Stock will typically be the most expensive purchase method
because it involves giving up ownership, however if the PE multiple is
high, then it may be a cheaper option. Additionally, when you pay in
stock, the seller has a stake in the success of the deal and it will not pay
out taxes immediately.
⩥ How does an Acquirer determine the mix of Cash, Debt, and Stock to
use in a deal? Answer: Since cash is usually the cheapest option, you
might assume that the seller will MAX out cash while still preserving
the minimum cash balance. Then might max out debt while still
preserving the debt/ebitda and ebitda/interest ratios. Then, if more
funding is needed, the remaining will be funded by stock
