Merger Model (M&A) EXAM Questions With Correct Solutions All Verified By An Expert A+ Graded
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Course
Wall Street Prep
Institution
Wall Street Prep
What is an M&A model - ANS used to analyze the financial profiles of 2 companies, the purchase price, and how the purchase is made, and determines whether the buyer's EPS increases or decreases.
Walk me through a basic merger model - ANS Step 1: Making assumptions about the acquisition - the...
Merger Model (M&A) EXAM
Questions With Correct Solutions All
Verified By An Expert A+ Graded
, What is an M&A model - ANS used to analyze the financial profiles of 2 companies, the
purchase price, and how the purchase is made, and determines whether the buyer's EPS
increases or decreases.
Walk me through a basic merger model - ANS Step 1: Making assumptions about the
acquisition - the price and whether it was cash, stock or debt, or some combination of those.
Step 2: You determine the valuations and shares outstanding of the buyer and seller and project
out an income statement for each one
Step 3: you combine the income statements, adding up line items such as revenue and
operating expenses, and adjusting for foregone interest on cash and interest paid on debt in the
K
combined pre-tax income line; you apply the buyer's tax rate to get the combined net income,
and then divided by the new share count to determine the combined EPS/
C
What is the difference between a merger and an acquisition? - ANS There are always a buyer
and seller in any M&A deal - the difference is that in a merger the companies are close to the
same size, whereas in an acquisition the buyer is significantly larger
LO
Why would a company want to acquire another company? - ANS *The buyer wants to gain
market share by buying a competitor
*The buyer needs to grow more quickly and sees an acquisition as a way to do that
*The buyer believes the seller is undervalued
YC
*The buyer wants to acquire the seller's customers so it can up-sell and cross-sell to them
*The buyer thinks the seller has a critical technology, intellectual property or some other "secret
sauce" it can use to significantly enhance its business
*The buyer believes it can achieve significant synergies and therefore make the deal accretive
for its shareholders
D
Why would an acquisition be dilutive? - ANS An acquisition is dilutive if the additional amount
of net income the seller contributes is not enough to offset the buyer's foregone interest on
cash, additional interest paid on debt, and the effects of issuing additional shares.
U
Acquisition effects - such as amortization of intangibles - can also make an acquisition dilutive.
Is there a rule of thumb for calculating whether an M&A deal will be accretive or dilutive? - ANS
ST
In an all-stock deal, if the buyer has a higher P/E than the seller, it will be accretive; if the buyer
has a lower P/E, it will be dilutive.
If the deal involves just cash and debt, you can sum the interest expense for debt and the
foregone interest on cash, then compare it against the seller's pre-tax income.
If the deal involves cash, stock, and debt, there's no quick rule-of-thumb you can use.
What are the complete effects of an aquisition? - ANS *Foregone interest on cash (the buyer
loses the interest it would have otherwise earned if it uses cash for the acquisition)
*Additional interest on debt (the buyer pays additional interest expense if it uses debt)
*Additional shares outstanding (if the buyer pays with stock it must issue additional shares)
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