medium · Investment Banking ma-lbo
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 lost interest income is never recovered through the target's dividend payments.
- No, because the acquirer's 20.0x P/E multiple is higher than the target's 15.0x P/E multiple.
- Yes, because the 0.75% after-tax cost of cash is less than the 6.67% target earnings yield
- Yes, since all-cash deals are structurally always more accretive than comparable all-stock transactions.
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