Tricky technical question
Can anyone help me with this?
Question I found online: Company A has $40 in earnings and 10 shares outstanding, and buys company B which has $25 in earnings and 5 shares outstanding. The purchase price is 12X earnings, paid with cash using debt at 6% interest. Tax rate is 40%. What is the accretion per share?
Associated answer: Eventually figured it out....65-18(interest expense)+7.2(tax shield)=$54.2, divided by 10 shares=$5.42, minus original EPS 4=$1.42 accretion per share.
I can't quite follow where the answer is getting its numbers.
Also wanted to ask how this question could be phrased with other considerations involved. Like % cash or % equity in the consideration
The way this works is as follows:
65 = consolidated earnings of A and B, 40 + 25. Assumes no synergies. 18 = incremental interest expense equal to 6% of 300, which is the given purchase price of 12x on B's earnings of 25. 7.2 = reduction in tax expense, given 40% tax rate applied to a reduction of $18 in pretax income from interest.
Pro forma net income = 40 + 25 - (0.06 * (1-0.4) * 300), hope that makes it clear. Since you funded the acquisition entirely with debt, shares outstanding is still 10, so new EPS is $5.42.
Another way you could think about this is: you are buying an asset for $300 using debt, and your post-tax cost of debt is 3.6%. In return you are getting an earnings yield of ~8.33% (1/12, the inverse of the purchase multiple) and so your accretion is equal to the spread between these two times the value of the generating asset, namely (8.33% - 3.6%) * 300 = 4.73% * 300 = 14.2. Since there are 10 shares outstanding accretion per share is $1.42.
Voluptatem ut rerum repellat enim. Ut maxime rem nesciunt qui. Molestiae similique iste ipsam optio molestiae. Eveniet cum voluptate incidunt ducimus.
Deleniti illum natus est in. Rerum veritatis dolorum laudantium corrupti omnis. Qui corporis praesentium molestias et omnis. Ea error beatae earum fugit ratione autem iusto minima. Adipisci dolorum sit et. Deserunt voluptas maxime delectus soluta.
Nisi ipsam blanditiis dignissimos est ipsam expedita quisquam ut. Quam dolorem ea possimus nesciunt incidunt vel. Quod et hic quos reiciendis mollitia. Pariatur inventore adipisci velit modi esse.
Nostrum vero vel est sed quia quibusdam et unde. Sed commodi cupiditate maxime quia. Quod qui in laborum architecto culpa suscipit voluptatum.
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...