2 More Interview Questions and I wont bother you guys anymore :) Thank you
This site is amazing btw. You guys are so helpful.
Walk me through how a $120 asset losing 40% of its value affects the 3 statements assuming a 40% tax rate.
If you have a company with 8x P/E and you use 15% interest debt with a 40% tax rate is it Accretive or dilutive?
Not going to do the asset write down because you can easily google "asset write down 3 statements" and find an answer. As for the acc/dil analysis, I assuming the transaction is 100% debt and the target is 8 P/E. Anyways, the acquiring company's financing cost is 15%(1-.4) = 9%, note that we muliply the interest rate by the after-tax rate due to the interest tax shield. The target company's earnings yield is 1/8 (inverse of P/E) or 12.5%. So it costs the acquiror 9% to acquire earnings that yield 12.5%, so the transaction is Accretive.
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