PRACTICE · LEVEL 2 · ABOUT 10 MIN
Not triedAccretion or dilution: stock versus debt
Buyer: net income $60M, 30M shares, share price $40. Target: net income $12M, equity purchase price $300M.
First, fund the deal entirely with new buyer shares. Then fund it entirely with new debt.
Assumptions
- New shares are issued at the current share price.
- Debt costs 6.0% a year; interest is tax deductible at an assumed 25% rate.
- No premium beyond the stated price, no synergies, fees, or purchase accounting adjustments.
- This tests EPS mechanics only. Whether the deal creates value is a different question.
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