An accretive/dilutive question given ROE of one firm and P/E ratio of the other
Just got this one from interview:
Listed companies A and B, A has an ROE of 9%, B has a P/E ratio of 10x. Now A acquires B in all-stock, is this deal Accretive or dilutive? Follow-up: What if A does it in all-cash? What if A is a private company?
I only know in an all-stock deal, if A has a higher/lower P/E ratio than B, it will be Accretive/dilutive. But how can I derive P/E ratio from ROE? And why A's being listed or private would make a difference?
Thanks in advance!
I am not positive, but I think ROE could be a proxy for the yield of equity.
So a 9% ROE would translate into a P/E where E/P = 9%, which is a P/E of 11.1. In the all stock deal, the acquisition of a firm with a 10 P/E with stock that is at 11.1 P/E would be Accretive. Can anyone back this up?
As far as the other two, I think more advanced guys will have to chime in.
This was my first thought too.
I'd also guess that if A is private, the answer doesn't change. Assuming ROE is calculated on BV (as it usually is) then it's still going to be Accretive. And I believe you'd need more information to answer the 100% cash scenario, because I could see it going either way.
ROE is calculated on book value so you need the P/B valuation to complete the math.
How would you do that?
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