Larger PE funds and / or PE firms executing LBOs in non-cyclical industries with recurring cash flows aim for 20% IRR, which is a 2.5x multiple of capital over 5 years. 25% IRR is the threshold for LBOs in more cyclical industries with higher growth rates, such as growth equity investments. This is ...

Earnings yield of the target is the reciprocal of the P/E, or 1/8=12.5% 12.5% > 12%, earnings yield of target > cost of financing Therefore the deal is accretive....

There are several reasons why the P/E ratio of the target company may be lower than that of the acquirer: Liquidity: The smaller target company may be less liquid than the larger acquiring company and have significantly less trading volume, making it harder to buy and sell the stock. Small Company R...

Industry consolidation is when smaller and more fragmented companies are being acquired by larger companies in the same industry. This often becomes a self reinforcing trend. As more and more small companies are acquired, there will be fewer and fewer left, leading to a scarcity effect where demand ...

Cost of equity of acquiror:1/10=10% Cost of acquisition capital:(50%)(10%)(1-40%)+(50%)(10%)= (5%)(60%)+(5%)= 3%+5%= 8% Earnings yield of the target:1/12=8.33% 8.33% > 8%, earnings yield of the target > cost of acquisition capitalTherefore the acquisition is accretive....

This is because interest expense is tax deductible. Any new debt raised to buy the company will result in more interest expense, which will reduce tax expense. Therefore, the true cost of debt is the after-tax of debt, which is equal to the pre-tax cost of debt x (1-tax rate)....

Purchase Price of Target$20 share purchase pricex 500k shares outstanding$10,000k purchase price Interest Expense$10,000k purchase pricex 25% financed by debt$2,500k debtx 8% interest rate $400 pre-tax interest expensex 60% 1- tax rate$120 after-tax interest expense # of Shares Issued$10,000k purcha...

Cost of Equity for Company A1÷ 10 P/E of Company A10% Weighted Average Cost of Capital (WACC)(% Equity)(Cost of Equity) + (% Debt)(Cost of Debt)(1-Tax Rate) + (% Cash)(Cost of Cash)(1-Tax Rate)= (25%)(10%) + (50%)(10%)(1-40%)+(25%)(1%)(1-40%)= 2.5%+(5%)(60%)+(0.25%)(60%)= 2.5%+3%+0.15%= 5.5%+0.15%=...

Equity Value of Company B $4 share pricex 15 shares outstanding$60 equity valuex 1.25 (25% premium)$75 acquisition price # of Shares Issued to Buy Company B $75 equity value÷ $3 share price25 shares issued Total # of Shares Outstanding 160 common shares outstanding+ 25 shares issued185 total shares...

If there are revenue synergies of $50M in additional unit sales, then this also suggests that these extra units sold will incur an additional cost. Since we know that the gross margin is 60%, we can assume that cost of goods sold can be calculated as $50M x 60% = $30M. Therefore, we are earning [&he...