M&A MODELING EXAM ANSWERS FROM
WALL STREET PREP EXAMINATION TEST
2026 QUESTIONS WITH SOLUTIONS
GRADED A+
⩥ 2. How can you analyze an M&A deal and determine whether or not it
makes sense? Answer: "The qualitative analysis depends on the factors
above: Could the deal help the company expand geographies; products;
or customer bases; give it more intellectual property; or improve its
team? The quantitative analysis might include a valuation of the Seller to
see if it's undervalued; as well as a comparison of the expected IRR to
the Buyer's WACC. Finally; EPS accretion/dilution is very important in
most deals because few Buyers want to execute dilutive deals; investors
focus tremendously on near-term EPS; so dilutive deals tend to make
companies' stock prices decline."
⩥ Walk me through a merger model (accretion/dilution analysis).
Answer: "1. projecting the financial statements of the Buyer and Seller.
2. estimate the Purchase Price and the mix of Cash; Debt; and Stock
used to fund the deal. 3. You create a Sources & Uses schedule and
Purchase Price Allocation schedule to estimate the true cost of the
acquisition and its effects. 4. 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. 5. 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. 6. 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. 7. 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 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. For example; if the Seller
contributes $100 in Pre-Tax Income; but the deal costs the Buyer only
$70 in Interest Expense; and it doesn't issue any new shares; the deal
will be accretive because the Buyer's Earnings per Share (EPS) will
increase. A deal will be dilutive if the opposite happens. For example; if
the Seller contributes $100 in Pre-Tax Income but the deal costs the
Buyer $130 in Interest Expense; and its share count remains the same;
its EPS will decrease."
⩥ 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."
⩥ 6. Why do you focus so much on EPS in M&A deals? Answer:
"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 EBITDA
and Unlevered FCF are better in some ways; they don't reflect the deal's
full impact because they exclude Interest and the effects of new shares."
⩥ 7. How do you determine the Purchase Price in an M&A deal?
Answer: "If the Seller is public; you assume a premium over the Seller's
current share price based on average premiums for similar deals in the
market (usually between 10% and 30%). You can then use the DCF;
Public Comps; and other valuation methodologies to sanity-check this
figure. The Purchase Price for private Sellers is based on the standard
valuation methodologies; and you usually link it to a multiple of
EBITDA or EBIT since private companies don't have publicly traded
shares. If the Buyer expects significant synergies; it is often willing to
pay a higher premium or multiple for the Seller; though the impact isn't
necessarily 1:1."
⩥ What are the advantages and disadvantages of each purchase method
(Cash; Debt; and Stock) in M&A deals? Answer: "Cash tends to be the
cheapest option; most companies earn little Interest Income on it; so they
don't lose much by using it to fund deals. It's also fastest and easiest to
close Cash-based deals. The downside is that using Cash limits the
Buyer's flexibility in case it needs the funds for something else in the
, near future. Debt is normally cheaper than Stock but more expensive
than Cash; and deals involving Debt take more time to close because of
the need to find investors. Debt also limits the Buyer's flexibility
because additional Debt makes future Debt issuances more difficult and
expensive. Finally; Stock tends to be the most expensive option; though
it can sometimes be the cheapest; on paper; if the Buyer trades at very
high multiples. It dilutes the Buyer's existing investors; but it also
prevents the Buyer from paying any additional cash expense for the deal.
In some cases; the Buyer can also issue Stock more quickly than it can
issue Debt."
⩥ 9. How does an Acquirer determine the mix of Cash; Debt; and Stock
to use in a deal? Answer: "Since Cash is cheapest for most Acquirers;
they'll use all the Cash they can before moving to the other funding
sources. So you might assume that the Cash Available equals the
Acquirer's current Cash balance minus its Minimum Cash balance. After
that; Debt tends to be the next cheapest option. An Acquirer might be
able to raise Debt up to the level where its Debt / EBITDA and EBITDA
/ Interest ratios stay in-line with those of peer companies."
⩥ 10. Which purchase method does a Seller prefer in an M&A deal?
Answer: "The Seller has to balance taxes with the certainty of payment
and potential future upside. To a Seller; Debt and Cash are similar
because they mean immediate payment; but also immediate capital gains
taxes and no potential upside if the Buyer's share price increases. But
there's also no risk if the Buyer's share price decreases. Stock is more of
a gamble because the Seller could end up with a higher price if the
Buyer's share price increases; but it could also get a lower price the
share price drops. The Seller also avoids immediate taxes with Stock
WALL STREET PREP EXAMINATION TEST
2026 QUESTIONS WITH SOLUTIONS
GRADED A+
⩥ 2. How can you analyze an M&A deal and determine whether or not it
makes sense? Answer: "The qualitative analysis depends on the factors
above: Could the deal help the company expand geographies; products;
or customer bases; give it more intellectual property; or improve its
team? The quantitative analysis might include a valuation of the Seller to
see if it's undervalued; as well as a comparison of the expected IRR to
the Buyer's WACC. Finally; EPS accretion/dilution is very important in
most deals because few Buyers want to execute dilutive deals; investors
focus tremendously on near-term EPS; so dilutive deals tend to make
companies' stock prices decline."
⩥ Walk me through a merger model (accretion/dilution analysis).
Answer: "1. projecting the financial statements of the Buyer and Seller.
2. estimate the Purchase Price and the mix of Cash; Debt; and Stock
used to fund the deal. 3. You create a Sources & Uses schedule and
Purchase Price Allocation schedule to estimate the true cost of the
acquisition and its effects. 4. 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. 5. 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. 6. 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. 7. 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 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. For example; if the Seller
contributes $100 in Pre-Tax Income; but the deal costs the Buyer only
$70 in Interest Expense; and it doesn't issue any new shares; the deal
will be accretive because the Buyer's Earnings per Share (EPS) will
increase. A deal will be dilutive if the opposite happens. For example; if
the Seller contributes $100 in Pre-Tax Income but the deal costs the
Buyer $130 in Interest Expense; and its share count remains the same;
its EPS will decrease."
⩥ 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."
⩥ 6. Why do you focus so much on EPS in M&A deals? Answer:
"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 EBITDA
and Unlevered FCF are better in some ways; they don't reflect the deal's
full impact because they exclude Interest and the effects of new shares."
⩥ 7. How do you determine the Purchase Price in an M&A deal?
Answer: "If the Seller is public; you assume a premium over the Seller's
current share price based on average premiums for similar deals in the
market (usually between 10% and 30%). You can then use the DCF;
Public Comps; and other valuation methodologies to sanity-check this
figure. The Purchase Price for private Sellers is based on the standard
valuation methodologies; and you usually link it to a multiple of
EBITDA or EBIT since private companies don't have publicly traded
shares. If the Buyer expects significant synergies; it is often willing to
pay a higher premium or multiple for the Seller; though the impact isn't
necessarily 1:1."
⩥ What are the advantages and disadvantages of each purchase method
(Cash; Debt; and Stock) in M&A deals? Answer: "Cash tends to be the
cheapest option; most companies earn little Interest Income on it; so they
don't lose much by using it to fund deals. It's also fastest and easiest to
close Cash-based deals. The downside is that using Cash limits the
Buyer's flexibility in case it needs the funds for something else in the
, near future. Debt is normally cheaper than Stock but more expensive
than Cash; and deals involving Debt take more time to close because of
the need to find investors. Debt also limits the Buyer's flexibility
because additional Debt makes future Debt issuances more difficult and
expensive. Finally; Stock tends to be the most expensive option; though
it can sometimes be the cheapest; on paper; if the Buyer trades at very
high multiples. It dilutes the Buyer's existing investors; but it also
prevents the Buyer from paying any additional cash expense for the deal.
In some cases; the Buyer can also issue Stock more quickly than it can
issue Debt."
⩥ 9. How does an Acquirer determine the mix of Cash; Debt; and Stock
to use in a deal? Answer: "Since Cash is cheapest for most Acquirers;
they'll use all the Cash they can before moving to the other funding
sources. So you might assume that the Cash Available equals the
Acquirer's current Cash balance minus its Minimum Cash balance. After
that; Debt tends to be the next cheapest option. An Acquirer might be
able to raise Debt up to the level where its Debt / EBITDA and EBITDA
/ Interest ratios stay in-line with those of peer companies."
⩥ 10. Which purchase method does a Seller prefer in an M&A deal?
Answer: "The Seller has to balance taxes with the certainty of payment
and potential future upside. To a Seller; Debt and Cash are similar
because they mean immediate payment; but also immediate capital gains
taxes and no potential upside if the Buyer's share price increases. But
there's also no risk if the Buyer's share price decreases. Stock is more of
a gamble because the Seller could end up with a higher price if the
Buyer's share price increases; but it could also get a lower price the
share price drops. The Seller also avoids immediate taxes with Stock
