Technical question - Calculative max cost of debt for an accretive deal
I had a phone interview with Morgan Stanley and was stuck with this question.
Assuming you have 2 firms,
Company A - P/E = 20x
Company B - P/E = 10x
Assuming a 50% tax, what is the maximum cost of debt Company A would pay to acquire Company B?
I understand that when you inverse the P/E multiple, you get the cost of equity. This means that the cost of equity for Company A is [1/20] 5%, cost of equity for C1ompany B is [1/10] 10%. However, I do not know how to reconcile the numbers from here. All help is appreciated