medium · Investment Banking valuation-core
Buyer Co. is considering a 100% cash-funded (debt-financed) acquisition of Target Co. The acquisition P/E is 12.5x. Acquirer's after-tax cost of debt is 6%.
Ignoring synergies and transaction D&A, is the deal accretive or dilutive?
- Dilutive, since the acquirer's cost of debt exceeds the target's earnings yield here
- Dilutive, because taking on more debt to fund the deal weighs on reported earnings
- Accretive, because the target's earnings yield exceeds the after-tax cost of debt.
- Accretive, simply because $12.5 is considered a relatively low P/E multiple to pay
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