Accretion/dilution in an all-cash deal
Hi, since cost of cash is essentially zero, an all-cash deal is always accretive. Is this reasoning correct?
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From my understanding, an all-cash deal doesn't necessarily mean the acquiring company is financing purely from cash reserves. They can finance the deal from debt and equity too. So an all-cash deal isn't always accretive.
This is correct, but in most interviews they will specify if it's cash on balance sheet or debt. In the case of cash on balance sheet, as the poster mentioned it's nearly always accretive. The better answer is that the deal is accretive if the added earnings exceed the forgone interest generated by the cash on the balance sheet, which is again, nearly always the case .
I agree.
Best way to think of it IMO, is to flip P/E round and think of it as earnings yield. Cost of cash is the foregone interest rate, yield is 1(/P/E).
If it's debt then tax after-tax cost of debt and compare that to the yield.
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