Accretive / Dilutive Question

Hi,

I'm trying to get my head around merger consequences analysis and whether a deal is accretive / dilutive when funded through debt.

I understand that the deal will always be accretive if:

Net income of target + tax effected synergies > tax effected D&A step up + tax effected cost of debt

However, I've read on the forum that if the cost of debt is higher than the equity yield ( inverse of the P/E ratio), then the deal will be dilutive. I can't really get my head around this, I understand it logically, but I don't see how it is true in practice.

The cost of debt is going to be a small percentage of the purchase price - this is not linked to the actual earnings of the target. As long as the additional earnings from the acquisition are higher than the interest expense, surely the deal will always be Accretive regardless? Would the cost of debt not have to be huge to outweigh the additional earnings achieved?

Basically, i'm not sure I understand how the target's share price and earnings are linked to the acquirer's cost of debt.

Thanks for any help.

1 Comments
 

Magnam et aliquam fuga voluptates. Et laboriosam soluta nam vero nihil soluta libero. Quia impedit quisquam soluta culpa sapiente itaque quos. Porro a quasi nihil totam voluptatum eaque optio cumque.

Libero vel molestias ipsam vel est natus itaque. Incidunt modi quia eum.

Id id rerum similique nulla minima quibusdam facilis. Consequatur nihil neque ut amet. Quia porro natus eos.

Career Advancement Opportunities

July 2026 Investment Banking

  • Evercore 01 99.4%
  • Moelis & Company 01 98.9%
  • JPMorgan 01 98.3%
  • Guggenheim Partners 01 97.7%
  • Morgan Stanley 07 97.2%

Overall Employee Satisfaction

July 2026 Investment Banking

  • Moelis & Company No 99.4%
  • Evercore No 98.9%
  • Morgan Stanley 01 98.3%
  • Banco Santander 02 97.7%
  • BMO Capital Markets 12 97.2%

Professional Growth Opportunities

July 2026 Investment Banking

  • Evercore 01 99.4%
  • Moelis & Company 01 98.9%
  • Morgan Stanley 06 98.3%
  • Goldman Sachs 01 97.7%
  • JPMorgan 01 97.2%

Total Avg Compensation

July 2026 Investment Banking

  • Vice President (16) $429
  • Associates (46) $258
  • 3rd+ Year Analyst (8) $210
  • 2nd Year Analyst (22) $179
  • Intern/Summer Associate (14) $159
  • 1st Year Analyst (80) $150
  • Intern/Summer Analyst (73) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
kanon's picture
kanon
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Secyh62's picture
Secyh62
99.0
5
dosk17's picture
dosk17
98.9
6
GameTheory's picture
GameTheory
98.9
7
Betsy Massar's picture
Betsy Massar
98.9
8
CompBanker's picture
CompBanker
98.9
9
DrApeman's picture
DrApeman
98.9
10
numi's picture
numi
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”