medium · Investment Banking
An acquirer with a P/E of 20.0x uses 100% cash earning 1.0% pre-tax to buy a target at a P/E of 15.0x. The tax rate is 25%.
Without synergies, is the deal accretive?
- No, because the interest income lost is not recovered through target dividends
- No, because the acquirer's P/E is higher than the target's P/E
- Yes, because the 0.75% after-tax cost of cash is less than the 6.67% target earnings yield
- Yes, because all-cash deals are always more accretive than all-stock deals
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