How would I solve this problem? Would I have to make assumptions about Net Income?
A buys B, A: P/E 15x, B: P/E/ 10x, A's borrowing cost is 5%, assuming no tax, all debt transaction, what is the max value A can pay to make this deal neutral?
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Max is 20x P/E
How did you get to 20x? Thanks! Really appreciate it.
seller yield is the inverse of target co's P/E ratio which is how much you get in net income per dollar spent. In this case the cost of acquisition is 5% after tax thru debt and to break even the yield needs to be 5%, hence 20x P/E.
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