View the step-by-step solution to:

You are analyzing an acquisition using either 100% debt or 100% equity as the only two financing solutions.

1.    You are analyzing an acquisition using either 100% debt or 100% equity as the only two financing solutions. You perform an analysis of capital sources and the impact on the firm's earnings for the $3 billion deal. ABC Inc. currently has 800 million shares outstanding and a market price of $50 per share. The firm has a cost of debt (before tax) of 7 percent. The target firm has $800 million in debt carrying a 12% rate that will be assumed by ABC Inc. You run an analysis that includes a five-year projection for the combined company to determine EBIT in Table 3. Using either all equity ($50 issuance price) or all debt (7%) to buy Target Co., assuming no flotation costs in this model, and assuming 30% tax rate, when is the deal accretive to earnings and how should the firm finance the acquisition? 


Table 3. Combined projection of EBIT for ABC Inc and Target Company & EPS for ABC Alone Without Acquisition.


Combined Without Acquisition

EBIT ABC Inc EPS

Year 0 4,500,000,000   $2.75

Year 1 4,455,000,000 $2.97

Year 2 4,722,300,000 $3.21

Year 3 5,194,530,000 $3.46

Year 4 5,713,983,000 $3.74

Year 5 6,171,101,640 $4.04

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question