M&I 400 MERGER MODEL (BASIC &
ADVANCED) EXAM QUESTIONS AND
ANSWERS GRADED A+ 2026
Walk me through a basic merger model. - ANS "A merger model is used to analyze the
financial profiles of 2 companies, the purchase price and how the purchase is made, and
determines whether the buyer's EPS increases or decreases.
Step 1 is making assumptions about the acquisition - the price and whether it was cash, stock or
debt or some combination of those. Next, you determine the valuations and shares outstanding
of the buyer and seller and project out an Income Statement for each one.
Finally, you combine the Income Statements, adding up line items such as Revenue and
Operating Expenses, and adjusting for Foregone Interest on Cash and Interest Paid on Debt in
the Combined Pre-Tax Income line; you apply the buyer's Tax Rate to get the Combined Net
Income, and then divide by the new share count to determine the combined EPS."
What's the difference between a merger and an acquisition? - ANS There's always a buyer
and a seller in any M&A deal - the difference between "merger" and "acquisition" is more
semantic than anything. In a merger the companies are close to the same size, whereas in an
acquisition the buyer is significantly larger.
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
1
,Why would a company want to acquire another company? - ANS Several possible reasons:
1. The buyer wants to gain market share by buying a competitor.
2. The buyer needs to grow more quickly and sees an acquisition as a way to do that.
3. The buyer believes the seller is undervalued.
4. The buyer wants to acquire the seller's customers so it can up-sell and cross-sell to them.
5. The buyer thinks the seller has a critical technology, intellectual property or some other
"secret sauce" it can use to significantly enhance its business.
6. The buyer believes it can achieve significant synergies and therefore make the deal
accretive for its shareholders.
Why would an acquisition be dilutive? - ANS An acquisition is dilutive if the additional
amount of Net Income the seller contributes is not enough to offset the buyer's foregone
interest on cash, additional interest paid on debt, and the effects of issuing additional shares.
Acquisition effects - such as amortization of intangibles - can also make an acquisition dilutive.
Is there a rule of thumb for calculating whether an acquisition will be accretive or dilutive? -
ANS If the deal involves just cash and debt, you can sum up the interest expense for debt and
the foregone interest on cash, then compare it against the seller's Pre-Tax Income.
And if it's an all-stock deal you can use a shortcut to assess whether it is accretive (see question
#5).
But if the deal involves cash, stock, and debt, there's no quick rule-of-thumb you can use unless
you're lightning fast with mental math.
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
2
, A company with a higher P/E acquires one with a lower P/E - is this accretive or dilutive? -
ANS Trick question. You can't tell unless you also know that it's an all-stock deal. If it's an all-
cash or all-debt deal, the P/E multiples of the buyer and seller don't matter because no stock is
being issued.
Sure, generally getting more earnings for less is good and is more likely to be accretive but
there's no hard-and-fast rule unless it's an all-stock deal.
What is the rule of thumb for assessing whether an M&A deal will be accretive or dilutive? -
ANS In an all-stock deal, if the buyer has a higher P/E than the seller, it will be accretive; if the
buyer has a lower P/E, it will be dilutive.
On an intuitive level if you're paying more for earnings than what the market values your own
earnings at, you can guess that it will be dilutive; and likewise, if you're paying less for earnings
than what the market values your own earnings at, you can guess that it would be accretive.
What are the complete effects of an acquisition? - ANS 1. Foregone Interest on Cash - The
buyer loses the Interest it would have otherwise earned if it uses cash for the acquisition.
2. Additional Interest on Debt - The buyer pays additional Interest Expense if it uses debt.
3. Additional Shares Outstanding - If the buyer pays with stock, it must issue additional shares.
4. Combined Financial Statements - After the acquisition, the seller's financials are added to the
buyer's.
5. Creation of Goodwill & Other Intangibles - These Balance Sheet items that represent a
"premium" paid to a company's "fair value" also get created
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
3
ADVANCED) EXAM QUESTIONS AND
ANSWERS GRADED A+ 2026
Walk me through a basic merger model. - ANS "A merger model is used to analyze the
financial profiles of 2 companies, the purchase price and how the purchase is made, and
determines whether the buyer's EPS increases or decreases.
Step 1 is making assumptions about the acquisition - the price and whether it was cash, stock or
debt or some combination of those. Next, you determine the valuations and shares outstanding
of the buyer and seller and project out an Income Statement for each one.
Finally, you combine the Income Statements, adding up line items such as Revenue and
Operating Expenses, and adjusting for Foregone Interest on Cash and Interest Paid on Debt in
the Combined Pre-Tax Income line; you apply the buyer's Tax Rate to get the Combined Net
Income, and then divide by the new share count to determine the combined EPS."
What's the difference between a merger and an acquisition? - ANS There's always a buyer
and a seller in any M&A deal - the difference between "merger" and "acquisition" is more
semantic than anything. In a merger the companies are close to the same size, whereas in an
acquisition the buyer is significantly larger.
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
1
,Why would a company want to acquire another company? - ANS Several possible reasons:
1. The buyer wants to gain market share by buying a competitor.
2. The buyer needs to grow more quickly and sees an acquisition as a way to do that.
3. The buyer believes the seller is undervalued.
4. The buyer wants to acquire the seller's customers so it can up-sell and cross-sell to them.
5. The buyer thinks the seller has a critical technology, intellectual property or some other
"secret sauce" it can use to significantly enhance its business.
6. The buyer believes it can achieve significant synergies and therefore make the deal
accretive for its shareholders.
Why would an acquisition be dilutive? - ANS An acquisition is dilutive if the additional
amount of Net Income the seller contributes is not enough to offset the buyer's foregone
interest on cash, additional interest paid on debt, and the effects of issuing additional shares.
Acquisition effects - such as amortization of intangibles - can also make an acquisition dilutive.
Is there a rule of thumb for calculating whether an acquisition will be accretive or dilutive? -
ANS If the deal involves just cash and debt, you can sum up the interest expense for debt and
the foregone interest on cash, then compare it against the seller's Pre-Tax Income.
And if it's an all-stock deal you can use a shortcut to assess whether it is accretive (see question
#5).
But if the deal involves cash, stock, and debt, there's no quick rule-of-thumb you can use unless
you're lightning fast with mental math.
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
2
, A company with a higher P/E acquires one with a lower P/E - is this accretive or dilutive? -
ANS Trick question. You can't tell unless you also know that it's an all-stock deal. If it's an all-
cash or all-debt deal, the P/E multiples of the buyer and seller don't matter because no stock is
being issued.
Sure, generally getting more earnings for less is good and is more likely to be accretive but
there's no hard-and-fast rule unless it's an all-stock deal.
What is the rule of thumb for assessing whether an M&A deal will be accretive or dilutive? -
ANS In an all-stock deal, if the buyer has a higher P/E than the seller, it will be accretive; if the
buyer has a lower P/E, it will be dilutive.
On an intuitive level if you're paying more for earnings than what the market values your own
earnings at, you can guess that it will be dilutive; and likewise, if you're paying less for earnings
than what the market values your own earnings at, you can guess that it would be accretive.
What are the complete effects of an acquisition? - ANS 1. Foregone Interest on Cash - The
buyer loses the Interest it would have otherwise earned if it uses cash for the acquisition.
2. Additional Interest on Debt - The buyer pays additional Interest Expense if it uses debt.
3. Additional Shares Outstanding - If the buyer pays with stock, it must issue additional shares.
4. Combined Financial Statements - After the acquisition, the seller's financials are added to the
buyer's.
5. Creation of Goodwill & Other Intangibles - These Balance Sheet items that represent a
"premium" paid to a company's "fair value" also get created
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
3
