2 Interview Question PLEASE HELP :)

Oliverbaine's picture
Rank: Monkey | banana points 47

3 main factors when looking at options/warrants?

If a company at 20x P/E buys a company at 10x P/E, what is the breakeven interest rate if the trans. is financed 100% w/ debt?

THANK YOU

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Comments (7)

Sep 25, 2017

Assuming no taxes, 10%

Sep 25, 2017

Could you explain? I thought P/E multiple dont matter if using 100% debt?

Sep 25, 2017

The target company's P/E plays a role: Since the target company has a P/E of 10, this implies that their earnings yield (inverse of P/E) is 10%. Whatever consideration is used during the transaction, the cost of financing must be less than 10% in order for the transaction to be Accretive. In this case you're solving for the break even interest rate however, so that would be 10% assuming no taxes. Assuming there are taxes, then the interest tax-shield comes into effect and to find the breakeven rate you would solve r / (1-t) = 10% where t is the tax rate and r the interest rate you're solving for.

Sep 25, 2017

Thank you so much, BananaCrazy3620. Huge help. Could you help me with this one?

If you have senior secured bonds at 180M and unsecured bonds at 120M, EBITDA is 50M and EBITDA multiple is 5x, what price on the dollar would they be approximately trade for? THANK YOU

Sep 25, 2017

If you purchase a company with 10M EBITDA and 10x P/E multiple acquiring a company with 20x P/E multiple with 50% debt/25% equity/25% cash is it Accretive or dilutive? (tax rate 40%. interest rate 5%, no foregone interest on cash)

Is this correct?

My answer: Sellers yield (inverse of P/E)- 5%. Buyers after tax cost of debt= 3%. Cost of Equity= 10%. Cost of cash= 0

Cost of acquisition= cost of cash x % of cash used + cost of debt x % of debt used + cost of equity x % of equity used

0 x .25+3 x .50+10 x .25= 4

Therefore it is Accretive?

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Sep 25, 2017

Seller's yield is 10% so your cost would need to be the same, which gives you 10%

Sep 25, 2017