Based on this merger model I've been playing around with, the best way for the acquiror to fund the acquisition is with as much cash as it has, followed by stock, and preferably without having to issue any debt.
So clearly there is some "cost" associated with issuing stock that is between the foregone interest rate on cash and the cost of debt. What is this number or what factors influence this number?
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Are you sure your model is right? It's very rare that issuing stock is cheaper than issuing debt. The cost of issuing stock is the expected return on equity capital, which you have hopefully heard of if you've ever taken a finance class. Remember the CAPM? If you've still got a blank look on your face, hit up Wikipedia here: http://en.wikipedia.org/wiki/Cost_of_capital#Cost_of_equity
How are people who ask what the "cost" of equity is beating me out for jobs? Sonovabitch.
MissingNo. I feel your pain!
Issuing stock is the most expensive way to raise capital. It typically costs 30% and has a higher annual yield than doubt although the yield is not stated, but implied.
well, the "cost of stock" doesn't really reflect on the NI but on the number of shares you have.
Therefore, by issuing more stocks, you basically diluted your EPS
And yes, you do have some "cost of equity" based on capm, but capm is generally used to calculated the discount rate, which you don't have in the model for an a/d model.
Might be wrong though, just started 3 months ago.
I'm not talking about cost of equity for a capm model. Just the fact that issuing stock does not hurt my EPS as much as the interest on the debt, and i"M just wondering what that interest/dilution factor is for issuing stock.
Consider it from an IRR perspective. Sure debt hits the P&L, but equity financing is going to crush your IRR by cutting the eventual exit/terminal value in half.
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