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M&A Modeling – Wall Street Prep
Complete Exam Questions with Detailed
Answers and Explanations
1. A company acquires a target for $1 billion using $500 million in debt, $300 million
in cash, and $200 million in stock. Calculate the pro forma EPS if the acquirer's
EPS was $5, and the target's EPS was $2.5, with 10 million new shares issued.
ANSWER-To calculate pro forma EPS, start by determining the combined net income. The
acquirer's EPS is $5 with 10 million shares outstanding, so net income of $50 million. The target
has EPS of $2.5, and since the $1 billion purchase price implies 8 million target shares ($1
billion / $125 per share), its net income is $20 million. Together, the combined net income
before adjustments is $70 million. Next, I'd adjust for the $500 million in debt financing. At a
5% interest rate, the annual interest expense is $25 million, reducing the combined net income to
$45 million. The $300 million in cash doesn't impact EPS directly, as it's a one-time outflow, and
the $200 million in stock results in 10 million new shares being issued. The pro forma shares
outstanding are 20 million (10 million original + 10 million new shares). Dividing the adjusted
net income of $45 million by 20 million shares gives a pro forma EPS of $2.25.
2. A company with $300 million in net income and 50 million shares outstanding
finances a $500 million acquisition with $200 million in debt, $150 million in stock,
and $150 million in cash. The target has $50 million in net income, and the tax rate
is 40%. How do you calculate the pro forma EPS, and is the deal accretive or
dilutive?
ANSWER
a) -Step 1: Adjust for Debt Impact Interest Expense = Debt × Interest Rate (assume 5%
interest rate): Interest Expense = 200 𝑀 × 5 % = 10 𝑀 Interest Expense=200M×5%=10M
After-Tax Interest Expense = Interest Expense × (1 - Tax Rate): After-Tax Interest
Expense = 10 𝑀 × ( 1 − 0.40 ) = 6 𝑀 After-Tax Interest Expense=10M×(1−0.40)=6M
b) Step 2: Calculate Shares Issued for Stock Portion Shares Issued = Stock Portion ÷
Acquirer's Share Price (assume $50 per share): Shares Issued = 150 𝑀 50 = 3 𝑀 Shares
Issued= 50 150M =3M
c) Step 3: Combine Net Income Acquirer's Net Income: $300M. Target's Net Income:
$50M. Adjust for After-Tax Interest Expense: Pro Forma Net Income = 300 𝑀 + 50 𝑀 −
6 𝑀 = 344 𝑀 Pro Forma Net Income=300M+50M−6M=344M
d) Step 4: Calculate Total Shares Outstanding Acquirer's Existing Shares = 50M. New
Shares Issued = 3M. Total Shares Outstanding: Total Shares = 50 𝑀 + 3 𝑀 = 53 𝑀 Total
Shares=50M+3M=53M
e) Step 5: Calculate Pro Forma EPS Pro Forma EPS = Pro Forma Net Income ÷ Total
Shares Outstanding: Pro Forma EPS = 344 𝑀 53 𝑀 = 6.49 Pro Forma EPS= 53M 344M
=6.49 Step 6: Compare to Standalone EPS Acquirer's Standalone EPS = $300M ÷ 50M =
$6.00. Pro Forma EPS = $6.49. Conclusion: The deal is accretive because the pro forma
EPS ($6.49) is higher than the acquirer's standalone EPS ($6.00). Key Takeaway: The
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mix of debt, stock, and cash contributes to accretion by limiting dilution and efficiently
leveraging the target's earnings.
3. A company with a P/E ratio of 15 acquires another company with a P/E ratio of 10 in an
all-stock deal. Is the deal accretive or dilutive, and why?
- ANSWER-Why It's Accretive: The acquirer is effectively paying less for each dollar of the
target's earnings than its own valuation. This means the target's earnings contribute more to the
combined company's EPS than the cost of issuing new shares. Key Insight: When the acquirer's
P/E is higher than the target's, the deal is typically accretive, assuming no other factors like
synergies or costs disrupt the calculation. Key Takeaway: The deal increases EPS for the
acquirer's shareholders because the target's earnings are more "valuable" relative to the acquirer's
own valuation.
4. A company with a share price of $40 and P/E ratio of 20 acquires another
company with a share price of $30 and P/E ratio of 10 in an all-stock deal.
Determine whether the deal is accretive or dilutive.
ANSWER-The deal is accretive because the acquirers 20x P/E ratio is higher than the targets
10x P/E ratio. In an all-stock transaction, the acquirer issues shares at a higher valuation to
purchase the targets earnings at a lower multiple.
5. An acquirer with EPS of $6 and 10 million shares outstanding acquires a target
with EPS of $2 and 5 million shares at a purchase price of $250 million. The deal
is financed 50% with stock and 50% with debt. Assume a tax rate of 40%.
Calculate the pro forma EPS.
ANSWER
a) Step 1: Combine Net Incomes Acquirer's Net Income: Acquirer Net Income = EPS ×
Shares Outstanding = 6 × 10 𝑀 = 60 𝑀 Acquirer Net Income=EPS×Shares
Outstanding=6×10M=60M Target's Net Income: Target Net Income = EPS × Shares
Outstanding = 2 × 5 𝑀 = 10 𝑀 Target Net Income=EPS×Shares
Outstanding=2×5M=10M Total Combined Net Income (before adjustments): Combined
Net Income = 60 𝑀 + 10 𝑀 = 70 𝑀 Combined Net Income=60M+10M=70M Adjust for
Debt Financing: Debt Financed = 50% of Purchase Price = $250M × 50% = $125M.
Interest Expense (assume 5% interest rate): Interest Expense = 125 𝑀 × 5 % = 6.25 𝑀
Interest Expense=125M×5%=6.25M After-Tax Interest Expense: After-Tax Interest
Expense = 6.25 𝑀 × ( 1 − 0.40 ) = 3.75 𝑀 After-Tax Interest
Expense=6.25M×(1−0.40)=3.75M Adjusted Combined Net Income: Pro Forma Net
Income = 70 𝑀 − 3.75 𝑀 = 66.25 𝑀 Pro Forma Net Income=70M−3.75M=66.25M
b) Step 2: Calculate New Shares Issued for Stock Portion Stock Financed = 50% of
Purchase Price = $125M. Acquirer Share Price = $50. New Shares Issued: New Shares
Issued = Stock Financed Acquirer Share Price = 125 𝑀 50 = 2.5 𝑀 New Shares Issued=
Acquirer Share Price Stock Financed = 50 125M =2.5M Total Shares Outstanding After
the Deal: Total Shares = Acquirer Shares + New Shares Issued = 10 𝑀 + 2.5 𝑀 = 12.5 𝑀
Total Shares=Acquirer Shares+New Shares Issued=10M+2.5M=12.5M
c) Step 3: Calculate Pro Forma EPS Pro Forma EPS: Pro Forma EPS = Pro Forma Net
Income Total Shares Outstanding Pro Forma EPS= Total Shares Outstanding Pro Forma
Net Income Pro Forma EPS = 66.25 𝑀 12.5 𝑀 = 5.30 Pro Forma EPS= 12.5M 66.25M
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=5.30 Conclusion: The pro forma EPS is $5.30, which is dilutive compared to the
acquirer's standalone EPS of $6.00.
6. An acquirer with net income of $100 million and 20 million shares outstanding
purchases a target with $20 million in net income in an all-stock deal, issuing 5
million new shares. Is the deal accretive or dilutive?
ANSWER
a) -Step 1: Calculate Acquirer's Standalone EPS EPS = Net Income ÷ Shares Outstanding
Standalone EPS = 100 𝑀 20 𝑀 = 5.00 Standalone EPS= 20M 100M =5.00
b) Step 2: Calculate Pro Forma Net Income Combined Net Income = Acquirer's Net Income
+ Target's Net Income Pro Forma Net Income = 100 𝑀 + 20 𝑀 = 120 𝑀 Pro Forma Net
Income=100M+20M=120M
c) Step 3: Calculate Pro Forma Shares Outstanding Total Shares = Acquirer's Shares + New
Shares Issued Pro Forma Shares = 20 𝑀 + 5 𝑀 = 25 𝑀 Pro Forma
Shares=20M+5M=25M Step 4: Calculate Pro Forma EPS Pro Forma EPS = Pro Forma
Net Income ÷ Pro Forma Shares Pro Forma EPS = 120 𝑀 25 𝑀 = 4.80 Pro Forma EPS=
25M 120M =4.80 Step 5: Compare EPS Acquirer's Standalone EPS = 5.00 Pro Forma
EPS = 4.80
7. Calculate the pro forma EPS if an acquirer with EPS of $4 and 100 million
shares outstanding acquires a target with EPS of $2 and 50 million shares
outstanding, assuming a 1:1 exchange ratio.
ANSWER-To calculate the pro forma EPS, I'd start by finding the combined net income. The
acquirer has EPS of $4 and 100 million shares, so its net income is $400 million. The target has
EPS of $2 and 50 million shares, giving it net income of $100 million. Together, the combined
net income is $500 million. Since the exchange ratio is 1:1, the acquirer issues 50 million new
shares, increasing the total shares outstanding to 150 million. Dividing the combined net income
of $500 million by the pro forma share count of 150 million gives a pro forma EPS of $3.33.
This reflects how the deal impacts the acquirer's earnings per share post-transaction.
8. Calculate the pro forma EPS if an acquirer with EPS of $5 and 10 million shares
acquires a company with EPS of $3 and 5 million shares in an all-stock deal. The
exchange ratio is 1.2. ANSWER
a) Step 1: Calculate New Share Count The acquirer issues new shares based on the
exchange ratio: New Shares Issued = Target Shares × Exchange Ratio New Shares
Issued=Target Shares×Exchange Ratio New Shares Issued = 5 𝑀 × 1.2 = 6 𝑀 New
Shares Issued=5M×1.2=6M Total shares outstanding after the deal: New Total Shares =
Acquirer Shares + New Shares Issued New Total Shares=Acquirer Shares+New Shares
Issued New Total Shares = 10 𝑀 + 6 𝑀 = 16 𝑀 New Total Shares=10M+6M=16M
b) Step 2: Combine Net Income Acquirer's Net Income: Acquirer Net Income = Acquirer
EPS × Acquirer Shares Acquirer Net Income=Acquirer EPS×Acquirer Shares Acquirer
Net Income = 5 × 10 𝑀 = 50 𝑀 Acquirer Net Income=5×10M=50M Target's Net Income:
Target Net Income = Target EPS × Target Shares Target Net Income=Target EPS×Target
Shares Target Net Income = 3 × 5 𝑀 = 15 𝑀 Target Net Income=3×5M=15M Combined
Net Income: Combined Net Income = 50 𝑀 + 15 𝑀 = 65 𝑀 Combined Net
Income=50M+15M=65M
M&A Modeling – Wall Street Prep
Complete Exam Questions with Detailed
Answers and Explanations
1. A company acquires a target for $1 billion using $500 million in debt, $300 million
in cash, and $200 million in stock. Calculate the pro forma EPS if the acquirer's
EPS was $5, and the target's EPS was $2.5, with 10 million new shares issued.
ANSWER-To calculate pro forma EPS, start by determining the combined net income. The
acquirer's EPS is $5 with 10 million shares outstanding, so net income of $50 million. The target
has EPS of $2.5, and since the $1 billion purchase price implies 8 million target shares ($1
billion / $125 per share), its net income is $20 million. Together, the combined net income
before adjustments is $70 million. Next, I'd adjust for the $500 million in debt financing. At a
5% interest rate, the annual interest expense is $25 million, reducing the combined net income to
$45 million. The $300 million in cash doesn't impact EPS directly, as it's a one-time outflow, and
the $200 million in stock results in 10 million new shares being issued. The pro forma shares
outstanding are 20 million (10 million original + 10 million new shares). Dividing the adjusted
net income of $45 million by 20 million shares gives a pro forma EPS of $2.25.
2. A company with $300 million in net income and 50 million shares outstanding
finances a $500 million acquisition with $200 million in debt, $150 million in stock,
and $150 million in cash. The target has $50 million in net income, and the tax rate
is 40%. How do you calculate the pro forma EPS, and is the deal accretive or
dilutive?
ANSWER
a) -Step 1: Adjust for Debt Impact Interest Expense = Debt × Interest Rate (assume 5%
interest rate): Interest Expense = 200 𝑀 × 5 % = 10 𝑀 Interest Expense=200M×5%=10M
After-Tax Interest Expense = Interest Expense × (1 - Tax Rate): After-Tax Interest
Expense = 10 𝑀 × ( 1 − 0.40 ) = 6 𝑀 After-Tax Interest Expense=10M×(1−0.40)=6M
b) Step 2: Calculate Shares Issued for Stock Portion Shares Issued = Stock Portion ÷
Acquirer's Share Price (assume $50 per share): Shares Issued = 150 𝑀 50 = 3 𝑀 Shares
Issued= 50 150M =3M
c) Step 3: Combine Net Income Acquirer's Net Income: $300M. Target's Net Income:
$50M. Adjust for After-Tax Interest Expense: Pro Forma Net Income = 300 𝑀 + 50 𝑀 −
6 𝑀 = 344 𝑀 Pro Forma Net Income=300M+50M−6M=344M
d) Step 4: Calculate Total Shares Outstanding Acquirer's Existing Shares = 50M. New
Shares Issued = 3M. Total Shares Outstanding: Total Shares = 50 𝑀 + 3 𝑀 = 53 𝑀 Total
Shares=50M+3M=53M
e) Step 5: Calculate Pro Forma EPS Pro Forma EPS = Pro Forma Net Income ÷ Total
Shares Outstanding: Pro Forma EPS = 344 𝑀 53 𝑀 = 6.49 Pro Forma EPS= 53M 344M
=6.49 Step 6: Compare to Standalone EPS Acquirer's Standalone EPS = $300M ÷ 50M =
$6.00. Pro Forma EPS = $6.49. Conclusion: The deal is accretive because the pro forma
EPS ($6.49) is higher than the acquirer's standalone EPS ($6.00). Key Takeaway: The
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mix of debt, stock, and cash contributes to accretion by limiting dilution and efficiently
leveraging the target's earnings.
3. A company with a P/E ratio of 15 acquires another company with a P/E ratio of 10 in an
all-stock deal. Is the deal accretive or dilutive, and why?
- ANSWER-Why It's Accretive: The acquirer is effectively paying less for each dollar of the
target's earnings than its own valuation. This means the target's earnings contribute more to the
combined company's EPS than the cost of issuing new shares. Key Insight: When the acquirer's
P/E is higher than the target's, the deal is typically accretive, assuming no other factors like
synergies or costs disrupt the calculation. Key Takeaway: The deal increases EPS for the
acquirer's shareholders because the target's earnings are more "valuable" relative to the acquirer's
own valuation.
4. A company with a share price of $40 and P/E ratio of 20 acquires another
company with a share price of $30 and P/E ratio of 10 in an all-stock deal.
Determine whether the deal is accretive or dilutive.
ANSWER-The deal is accretive because the acquirers 20x P/E ratio is higher than the targets
10x P/E ratio. In an all-stock transaction, the acquirer issues shares at a higher valuation to
purchase the targets earnings at a lower multiple.
5. An acquirer with EPS of $6 and 10 million shares outstanding acquires a target
with EPS of $2 and 5 million shares at a purchase price of $250 million. The deal
is financed 50% with stock and 50% with debt. Assume a tax rate of 40%.
Calculate the pro forma EPS.
ANSWER
a) Step 1: Combine Net Incomes Acquirer's Net Income: Acquirer Net Income = EPS ×
Shares Outstanding = 6 × 10 𝑀 = 60 𝑀 Acquirer Net Income=EPS×Shares
Outstanding=6×10M=60M Target's Net Income: Target Net Income = EPS × Shares
Outstanding = 2 × 5 𝑀 = 10 𝑀 Target Net Income=EPS×Shares
Outstanding=2×5M=10M Total Combined Net Income (before adjustments): Combined
Net Income = 60 𝑀 + 10 𝑀 = 70 𝑀 Combined Net Income=60M+10M=70M Adjust for
Debt Financing: Debt Financed = 50% of Purchase Price = $250M × 50% = $125M.
Interest Expense (assume 5% interest rate): Interest Expense = 125 𝑀 × 5 % = 6.25 𝑀
Interest Expense=125M×5%=6.25M After-Tax Interest Expense: After-Tax Interest
Expense = 6.25 𝑀 × ( 1 − 0.40 ) = 3.75 𝑀 After-Tax Interest
Expense=6.25M×(1−0.40)=3.75M Adjusted Combined Net Income: Pro Forma Net
Income = 70 𝑀 − 3.75 𝑀 = 66.25 𝑀 Pro Forma Net Income=70M−3.75M=66.25M
b) Step 2: Calculate New Shares Issued for Stock Portion Stock Financed = 50% of
Purchase Price = $125M. Acquirer Share Price = $50. New Shares Issued: New Shares
Issued = Stock Financed Acquirer Share Price = 125 𝑀 50 = 2.5 𝑀 New Shares Issued=
Acquirer Share Price Stock Financed = 50 125M =2.5M Total Shares Outstanding After
the Deal: Total Shares = Acquirer Shares + New Shares Issued = 10 𝑀 + 2.5 𝑀 = 12.5 𝑀
Total Shares=Acquirer Shares+New Shares Issued=10M+2.5M=12.5M
c) Step 3: Calculate Pro Forma EPS Pro Forma EPS: Pro Forma EPS = Pro Forma Net
Income Total Shares Outstanding Pro Forma EPS= Total Shares Outstanding Pro Forma
Net Income Pro Forma EPS = 66.25 𝑀 12.5 𝑀 = 5.30 Pro Forma EPS= 12.5M 66.25M
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=5.30 Conclusion: The pro forma EPS is $5.30, which is dilutive compared to the
acquirer's standalone EPS of $6.00.
6. An acquirer with net income of $100 million and 20 million shares outstanding
purchases a target with $20 million in net income in an all-stock deal, issuing 5
million new shares. Is the deal accretive or dilutive?
ANSWER
a) -Step 1: Calculate Acquirer's Standalone EPS EPS = Net Income ÷ Shares Outstanding
Standalone EPS = 100 𝑀 20 𝑀 = 5.00 Standalone EPS= 20M 100M =5.00
b) Step 2: Calculate Pro Forma Net Income Combined Net Income = Acquirer's Net Income
+ Target's Net Income Pro Forma Net Income = 100 𝑀 + 20 𝑀 = 120 𝑀 Pro Forma Net
Income=100M+20M=120M
c) Step 3: Calculate Pro Forma Shares Outstanding Total Shares = Acquirer's Shares + New
Shares Issued Pro Forma Shares = 20 𝑀 + 5 𝑀 = 25 𝑀 Pro Forma
Shares=20M+5M=25M Step 4: Calculate Pro Forma EPS Pro Forma EPS = Pro Forma
Net Income ÷ Pro Forma Shares Pro Forma EPS = 120 𝑀 25 𝑀 = 4.80 Pro Forma EPS=
25M 120M =4.80 Step 5: Compare EPS Acquirer's Standalone EPS = 5.00 Pro Forma
EPS = 4.80
7. Calculate the pro forma EPS if an acquirer with EPS of $4 and 100 million
shares outstanding acquires a target with EPS of $2 and 50 million shares
outstanding, assuming a 1:1 exchange ratio.
ANSWER-To calculate the pro forma EPS, I'd start by finding the combined net income. The
acquirer has EPS of $4 and 100 million shares, so its net income is $400 million. The target has
EPS of $2 and 50 million shares, giving it net income of $100 million. Together, the combined
net income is $500 million. Since the exchange ratio is 1:1, the acquirer issues 50 million new
shares, increasing the total shares outstanding to 150 million. Dividing the combined net income
of $500 million by the pro forma share count of 150 million gives a pro forma EPS of $3.33.
This reflects how the deal impacts the acquirer's earnings per share post-transaction.
8. Calculate the pro forma EPS if an acquirer with EPS of $5 and 10 million shares
acquires a company with EPS of $3 and 5 million shares in an all-stock deal. The
exchange ratio is 1.2. ANSWER
a) Step 1: Calculate New Share Count The acquirer issues new shares based on the
exchange ratio: New Shares Issued = Target Shares × Exchange Ratio New Shares
Issued=Target Shares×Exchange Ratio New Shares Issued = 5 𝑀 × 1.2 = 6 𝑀 New
Shares Issued=5M×1.2=6M Total shares outstanding after the deal: New Total Shares =
Acquirer Shares + New Shares Issued New Total Shares=Acquirer Shares+New Shares
Issued New Total Shares = 10 𝑀 + 6 𝑀 = 16 𝑀 New Total Shares=10M+6M=16M
b) Step 2: Combine Net Income Acquirer's Net Income: Acquirer Net Income = Acquirer
EPS × Acquirer Shares Acquirer Net Income=Acquirer EPS×Acquirer Shares Acquirer
Net Income = 5 × 10 𝑀 = 50 𝑀 Acquirer Net Income=5×10M=50M Target's Net Income:
Target Net Income = Target EPS × Target Shares Target Net Income=Target EPS×Target
Shares Target Net Income = 3 × 5 𝑀 = 15 𝑀 Target Net Income=3×5M=15M Combined
Net Income: Combined Net Income = 50 𝑀 + 15 𝑀 = 65 𝑀 Combined Net
Income=50M+15M=65M
