hard · Private Equity & LBOs
A public strategic buyer is evaluating an acquisition of a PE-backed company for 1B. The buyer has a P/E of 20x. The target has $50M in Net Income.
If the buyer funds the deal with 100% debt at a 5% after-tax cost, is the deal accretive or dilutive to the buyer's EPS?
- Accretive, as the target's earnings yield (5%) equals the cost of debt.
- Accretive, because any strategic acquisition is always accretive.
- Dilutive, due to the high purchase price relative to target earnings.
- Neutral, as the acquired earnings exactly offset the interest expense.
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