Accretion / Dilution Technical Question
100 shares, 8 P/E, 10 EPS. What's NI, Market Cap, and PPS? If you do a leveraged recap and raise 1,000 of debt at 12.5% to buy back shares, what is the accretion/dilution?
NI: 10*100=1000
PPS: 8*10=80
Mkt Cap: 80*100=8000
After leveraged recap:
NI=1000-(.125*1000)=875
Shares outstanding: 100-(1000/80)=87.5
New EPS: 875/87.5=10
A/D is at breakeven
Although the question itself is relatively easy and requires a basic amount of arithmetic, it does throw around a lot of information at once. What time would usually be given to a candidate if it was asked in the context of an interview? Thanks in advance.
Typically more time than you'd think. Usually ask for the question twice while you write down everything they're saying. They know you're under a lot of pressure, so they let you work things out in your head and even give you a few mistakes. Technicals aren't typically make-or-break an interview unless you completely butcher the answer. Much more weight is placed on behavioral/fit based questions.
For A/D question can you just say cost of equity is 1/PE = 1/8 = 0.125 = cost of debt so break even? Seems much easier to do it in head
You could, but I would say that second. Although some technicals try to trip prospects up on getting answers that don't look right initially (such as A/D is at breakeven), they like to see how you walk through the process. I would say that after you walk through this process, such as "or you could do it this way by..."
This doesn't take into account tax deductibility of interest payments
True, but he didn't give a tax rate to use
Wait for acc/dil part it's literally breakeven:
with no tax shield to apply, cost of debt is 12.5%,
then implied cost of equity = earnings yield = reciprocal of PE multiple (8.0 x) = 12.5% also :-p this some trick question
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