Interview Question Accretion Dilution
You have a target with an EV=100mm, D/total capitalization = 60%, and you pay a 50% premium on the share price. What is the equity value of the firm and the purchase equity value of the firm (target)?
pt. ii - let's say the cmopany had 4mm in NI and the acquirer has a PE of 15x, is it dilutive or accretive in an all stock deal?
my answer: eqv = 62.5, debt=37.5, assuming no cash. purchase EQV=93.75
pt ii answer : PE of acquirer is 15x, and PE of target is 93.75mm/4mm>15x, so dilutive.
Can someone confirm if this is the correct/logical way of doing this question?
Thank you.
The answer here would be that the deal is neither accretive nor dilutive in an all-stock deal.
Here's the thought process: Firstly, the 60% D/total capitalization ratio implies that debt is 60mm and equity value is 40mm assuming no cash. With the premium, the target's purchase equity value is 60mm. A good way to arrive at the target's yield is by dividing net income by purchase equity value. In this case it would be 4mm/60mm, which is roughly 6.67%. The acquirer's cost of equity is the reciprocal of the P/E ratio, which results in a cost of equity of 6.67%. Since the target's yield = the acquirer's cost of equity, the deal is neutral.
How is debt 60mm and equity value (total market cap)=40mm? The question states that D/Total capitalization = 60%, from your method, 60mm/40mm=150%.
EV = 100mm, meaning that total cap (equity value)+debt = 100mm
Total cap = D + E
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