{"id":21228,"date":"2019-11-13T00:12:48","date_gmt":"2019-11-13T05:12:48","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/biws\/?post_type=biws_kb&#038;p=21228"},"modified":"2024-09-11T07:05:56","modified_gmt":"2024-09-11T12:05:56","slug":"ma-interview-questions","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/ma-interview-questions\/","title":{"rendered":"Merger Model Interview Questions: What to Expect (18:38)"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-flat ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Merger Model Interview Questions: What to Expect<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/ma-interview-questions\/#Question_1_The_Basic_Rules\">Question #1: The Basic Rules<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/ma-interview-questions\/#Question_2_With_Real_Numbers\">Question #2: With Real Numbers<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/ma-interview-questions\/#Question_3_Equity_Value_Enterprise_Value_and_Valuation_Multiples\">Question #3: Equity Value, Enterprise Value, and Valuation Multiples<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/ma-interview-questions\/#Question_4_Ranges_for_the_Multiples\">Question #4: Ranges for the Multiples<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/ma-interview-questions\/#Question_5_What_if_the_Buyer_is_Twice_as_Big\">Question #5: What if the Buyer is Twice as Big?<\/a><\/li><li class='ez-toc-page-1'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/breakingintowallstreet.com\/kb\/ma-and-merger-models\/ma-interview-questions\/#Recap_Summary_and_Key_Principles\">Recap, Summary, and Key Principles<\/a><\/li><\/ul><\/nav><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Question_1_The_Basic_Rules\"><\/span>Question #1: The Basic Rules<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>&#8220;A company with a P \/ E multiple of 25x acquires another company for a purchase P \/ E multiple of 15x. Will the deal be accretive or dilutive?&#8221;<\/p>\n<p>ANSWER: You can\u2019t tell unless it\u2019s a 100% Stock deal. If it is, it will be accretive because the Cost of Acquisition is 1 \/ 25, or 4%, and the Seller\u2019s Yield is 1 \/ 15, or 6.7%. Since the Seller\u2019s Yield is higher, it will be accretive.<\/p>\n<p>For Cash and Debt deals, or deals with a mix of all three, you\u2019d calculate the Weighted Cost of Acquisition by using Foregone Interest Rate on Cash * (1 \u2013 Buyer\u2019s Tax Rate) * % Cash + Interest Rate on Debt * (1 \u2013 Buyer\u2019s Tax Rate) * % Debt + 1 \/ (Buyer\u2019s P \/ E Multiple) * % Stock and compare that to the Seller\u2019s Yield.<\/p>\n<div class='code-block code-block-2' style='margin: 8px 0; clear: both;'>\n<div class=\"kb-adinsert-modal\">\n    <div class=\"kb-adinsert-top\">\n      <div class=\"media\">\n          <img decoding=\"async\" class=\"alignnone size-full wp-image-28448\" src=\"https:\/\/biwsuploads-assest.s3.amazonaws.com\/biws\/wp-content\/uploads\/2024\/04\/24164120\/adv-fm-tile.png\" alt=\"PowerPoint Pro\" width=\"128\" height=\"128\" \/>\n      <\/div>\n      <div class=\"content\">\n          <h3>Master Financial Modeling for Investment Banking With <strong>BIWS Core Financial Modeling<\/strong><\/h3>\n      <\/div>\n    <\/div>\n    \n    <div class=\"full_text\">\n    \t<ul>\n        \t<li>\n            \t<h4>Become a financial modeling pro<\/h4>\n              <p>158 videos, detailed written guides, Excel files, quizzes, and more<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Complete 10+ detailed global case studies<\/h4>\n            <p>These include both the theory and the practical applications<\/p>\n\t\t\t    <\/li>\n          <li>\n          \t<h4>Prepare for your internship or full-time job<\/h4>\n            <p>Gain the skills you need to \u201chit the ground running\u201d on Day 1\n\n<\/p>\n\t\t\t  <\/li>\n      <\/ul>\n        \n      <a class=\"cta-link orange-button-medium\" href=\"https:\/\/breakingintowallstreet.com\/core-financial-modeling\/\" target=\"_blank\">Full Details<\/a>\n      \n      <a class=\"cta-link orange-button-medium bg-blue\" href=\"https:\/\/biws-support.s3.us-east-1.amazonaws.com\/Course-Outlines\/Core-Financial-Modeling-Course-Outline.pdf\" target=\"_blank\" rel=\"noopener\">Short Outline<\/a>\n    <\/div>\n<\/div><\/div>\n\n<h2><span class=\"ez-toc-section\" id=\"Question_2_With_Real_Numbers\"><\/span>Question #2: With Real Numbers<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>\u201cLet\u2019s say it is a 100% Stock deal. The Buyer has 10 shares at a share price of $25.00, and its Net Income is $10. It acquires the Seller for a Purchase Equity Value of $150. The Seller has a Net Income of $10 as well. Assume the same tax rates for both companies. How accretive is this deal?\u201d<\/p>\n<p>ANSWER: The buyer\u2019s EPS is $10 \/ 10 = $1.00. It must issue 6 additional shares to do the deal, so the Combined Share Count is 10 + 6 = 16.<\/p>\n<p>Since both companies have the same tax rate and since no Cash or Debt is used, Combined Net Income = $10 + $10 = $20, and Combined EPS = $20 \/ 16 = $1.25, so the deal is 25% accretive.<\/p>\n<style>.enteremail__large--inline{margin:60px auto!important}<\/style>\n<h2><span class=\"ez-toc-section\" id=\"Question_3_Equity_Value_Enterprise_Value_and_Valuation_Multiples\"><\/span>Question #3: Equity Value, Enterprise Value, and Valuation Multiples<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>\u201cWhat are the Combined Equity Value and Enterprise Value in this same deal? Assume that Equity Value = Enterprise Value for both the Buyer and Seller.\u201d<\/p>\n<p>ANSWER: Combined Equity Value = Buyer\u2019s Equity Value + Value of Stock Issued in the Deal = $250 + $150 = $400.<\/p>\n<p>Combined Enterprise Value = Buyer\u2019s Enterprise Value + Purchase Enterprise Value of Seller = $250 + $150 = $400.<\/p>\n<p>The Combined EV \/ EBITDA multiple won\u2019t be affected by the mix of Cash, Stock, and Debt, but the P \/ E multiple will be. It\u2019s 20x here ($400 \/ $20), but it will change for non-100%-Stock deals.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Question_4_Ranges_for_the_Multiples\"><\/span>Question #4: Ranges for the Multiples<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>\u201cWithout doing any math, what ranges would you expect for the Combined EV \/ EBITDA and P \/ E multiples, and why?\u201d<\/p>\n<p>ANSWER: They should be somewhere in between the Buyer\u2019s multiples and the Seller\u2019s purchase multiples. It\u2019s almost never a simple average because of the relative sizes of the Buyer and Seller \u2013 and for P \/ E, the purchase method also plays a role.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Question_5_What_if_the_Buyer_is_Twice_as_Big\"><\/span>Question #5: What if the Buyer is Twice as Big?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>&#8220;What happens if the Buyer is twice as big, i.e. it has an Equity Value of $500 and Net Income of $20?&#8221;<\/p>\n<p>ANSWER: The deal becomes *less* accretive because the company making it accretive, the Seller, now has a lower weighting. The Buyer was previously $250 \/ $400 of the total, but is now only $500 \/ $650, which is ~63% vs. ~77%, so we\u2019d expect accretion to fall by 10-15%, which it does.<\/p>\n<p>The Combined Multiples will all be closer to the Buyer\u2019s multiples now as well.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Recap_Summary_and_Key_Principles\"><\/span>Recap, Summary, and Key Principles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Principle #1: If the Seller\u2019s Yield is above the Weighted Cost of Acquisition, it\u2019s accretive; dilutive if the opposite.<\/p>\n<p>Principle #2: Combined Equity Value = Buyer\u2019s Equity Value + Value of Stock Issued in the Deal.<\/p>\n<p>Principle #3: Combined Enterprise Value = Buyer\u2019s Enterprise Value + Purchase Enterprise Value of Seller.<\/p>\n<p>Principle #4: The Combined P \/ E Multiple is affected by the Cash \/ Debt \/ Stock mix, but the Combined EV \/ EBITDA Multiple is not.<\/p>\n<p>Principle #5: The Combined Multiples will be in between the Buyer\u2019s multiples and the Seller\u2019s purchase multiples \u2013 exact numbers depend on sizes of the Buyer and Seller.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>You\u2019ll learn about the most common merger model questions in this tutorial, as well as what type of \u201cprogression\u201d to expect and the key principles you must understand in order to answer ANY math questions on this topic.<\/p>\n","protected":false},"featured_media":21895,"template":"","class_list":["post-21228","biws_kb","type-biws_kb","status-publish","has-post-thumbnail","hentry","kb_category-ma-and-merger-models"],"acf":[],"_links":{"self":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb\/21228","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/biws_kb"}],"about":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/types\/biws_kb"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media\/21895"}],"wp:attachment":[{"href":"https:\/\/breakingintowallstreet.com\/wp-json\/wp\/v2\/media?parent=21228"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}