Can someone help me understand in the simplest of terms the connection between P/E multiple and cost of debt in terms of which you would choose to use to fund an acquisition? i.e. what P/E multiple makes sense to issue stock vs. raising debt to fund an acquisition given an interest rate?
| +160 | UBS Tech layoff | 52 | 1d |
| +153 | Analyst: Why is UBS IB doing worse than peers?, UBS CFO: No Comment | 24 | 11h |
| +146 | UBS’s M&A BANKERS ARE DOING TERRIBLY. $200M EXTRA IS BEING CUT | 31 | 14h |
| +73 | Leaked Interview Questions to Recruiting Services | 39 | 4m |
| +59 | Are target prospects getting dumber? | 27 | 12h |
| +58 | How do YOU manage networking requests? | 17 | 19h |
| +37 | Quitting After First 4 months | 12 | 1d |
| +34 | MBB Pay Raises | 26 | 1d |
| +19 | Rothschild UK - Mining & Healthcare 2026 | 5 | 3d |
| +19 | Career Crossroads | 2 | 2d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
the absolute simplest way is to flip P/E and instead take E/P. That gives you the "earnings yield" on the current stock price. Now you have two comparable %'s to line up against each other. Then line up earnings yield vs. the cost of debt and see what is cheaper. Then choose the cheaper option.
If you follow the logic through, the higher P/E ratio you have, the lower earnings yield your stock price and therefore it becomes "cheaper" to finance with stock the higher the P/E goes.
This is obviously over-simplistic vs. the real world, but this is how it should be thought about in terms of interview questions and back-of-the-napkin math.
Et id maiores earum officiis quas beatae ad quis. Aut amet sunt facere. Cupiditate veniam et sit perspiciatis aut in. Tempore velit sit dolor nulla sit impedit iusto.
Aspernatur nostrum magni rem minima. Neque nihil ipsa delectus et a. Enim soluta voluptas sed consequatur quasi. Nam amet et sit nostrum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...