Merger model difficult

Question 1

What if the target had net debt?

Answer 1

You’d calculate Enterprise Value (EV) = Equity Value + Debt – Cash, then size the deal off EV.

Net debt reduces equity consideration, so fewer new shares (or less cash/debt financing) is required.

Question 2

Why does using stock help when the acquirer has a higher P/E?

Answer 2

When your P/E is high, your shares are “expensive” in earnings terms. Issuing high‑P/E stock to buy a lower‑P/E company means you give up fewer earnings per share than if you paid in cash or debt.

This makes the deal more likely to be accretive.

Question 3

What happens if interest rates rise?

Answer 3

The cost of any new debt financing goes up → higher interest expense → lower pro forma net income → reduced EPS accretion (or potential dilution).

It also increases the discount rate in DCF/LBO IRR hurdles, making deals tougher to clear.