I have worked on an accretion and dilution model before therefore i definitely expect to be asked about this. So could you guys please help me with any type of accretion dilution questions that you guys have come across before. That would be extremely helpful for me to prepare for my interview. I really appreciate this
Accretion Dilution Model Interview Questions
If you list experience with accretion and dilution models on your resume it is likely you will be asked a few questions on the subject. Here we have a list of our favorite questions and some answers on accretion dilution interview questions from our vast user base of wall street professionals, newbies and hopefuls.
From user @breakingbankers
Depending on the firm, the interviewer may pull out the basic financials, set up a scenario where one is acquiring another firm, and ask you if the deal will lead to an increase or decrease in EPS. And you need to walk the interviewer through the logic and mechanics.
A real life example from user @idmbanker
I got asked:
If your company's P/E ratio is 12 and you buy a company with P/E ratio of 10 will the deal be accretive or dilutive or do you need more information?
Answer: More information - if it's an all stock deal it will obviously be accretive but if it's not then I need more information
User @Newbie_banker gave an example answer of what to say if they replied to the above with "So if it's not an all stock deal, what other factors could make the deal dilutive?":
If it's an all cash deal, PE doesn't really matter. Suppose the cash consideration is 100% debt financed, PF EPS is:
Net income (Acquirer) + Net Income (target) + tax effected synergies - tax effected D&A step up - tax effected cost of debt / acquirer shares
From the above equation, it is clear that if net income of target + tax effected synergies > tax effected D&A step up + tax effected cost of debt, the deal is accretive.
After answering many accretion dilution interview questions, user @metalasian was asked:
Say you were to acquire to a company with a 10x PE ratio. Instead of using issuing stock, however, you decide to finance the acquisition using all debt with an interest rate of 10%. Is the deal accretive, dilutive or neutral?
User @Rupert Pupkin added that the most common question he has come across is:
If company A is trading at 9x and company B is trading at 6x should company A buy company B. Then they will ask if it's Accretive or dilutive.
User @alexpasch dropped the question:
A - 100M mkt cap, P/E of 10 is merging with B - 60M mkt cap, P/E of 20.
To whom is the deal Accretive/dilutive? What is the new P/E of the combined entity? What do the synergies have to be worth for it to be dilutive to neither party?
He then included the answer:
New entity has earnings of $13M and a mkt. cap of $160M, for a P/E of ~12. It is dilutive to A because their EPS goes down. If however, $3M of synergies per year are to be had, then now the company will have a market cap of $160M, and earnings will be $16M, so EPS is constant and it's dilutive to neither party.
For more fantastic questions and answers, feel free to peruse the over 150 comments from our users.
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