Case Studies Solving Guide

Question 1

Firepower Case – How to Solve

Answer 1

1️⃣ Current Net Debt

If ND/EBITDA = X
EBITDA = Y

→ Net Debt = X × Y

2️⃣ Combine EBITDA

Always use pro forma EBITDA:

→ Combined EBITDA = Acquirer EBITDA + Target EBITDA

Leverage applies to the combined company.

3️⃣ Max Allowable Net Debt

→ Max Net Debt = Max Leverage × Combined EBITDA

4️⃣ Debt Capacity

→ Debt Capacity = Max Net Debt – Current Net Debt

5️⃣ Total Firepower

→ Firepower = Debt Capacity + Cash

6️⃣ Target EV

→ Target EV = Purchase Multiple × Target EBITDA

If Firepower ≥ Target EV → Deal affordable.

Question 2

Accretion / Dilution – How to Solve

Answer 2

1️⃣ Standalone Net Income

Buyer NI = EPS × Shares
Target NI = EPS × Shares

2️⃣ Add Synergies

If synergies are pre-tax:

→ After-tax synergies = Synergy × (1 – Tax Rate)

3️⃣ Combined Net Income (Before Financing)

→ Combined NI = Buyer NI + Target NI + After-tax Synergies

4️⃣ Calculate Purchase Price

→ Target Equity Value = Share Price × Shares
→ Add Premium

5️⃣ Financing Structure

Stock deal:
→ New Shares = Purchase Price ÷ Buyer Share Price

Debt deal:
→ Interest Expense = Purchase Price × Interest Rate
→ After-tax interest = Interest × (1 – Tax Rate)

Cash deal:
→ Lost interest income

6️⃣ Pro Forma Net Income

→ Combined NI
– After-tax interest
– Lost interest income

7️⃣ Pro Forma Shares

Stock deal:
→ Old Shares + New Shares

Debt deal:
→ Shares unchanged

8️⃣ Pro Forma EPS

→ PF EPS = New NI ÷ New Shares

Compare to Buyer EPS.

Higher → Accretive
Lower → Dilutive