Marketing MCQ: Deals and Merger Models Equity Value

What is the equity value after a transaction?

Equity value of the acquirer + equity used in the transaction

This is because the rest of the equity value of the seller is converted into either cash or debt

How do you calculate the Cash Cost of using either Cash, Debt, or Equity?

Cash: Cash Used (Interest R(1-tax))
Debt: Debt used (Interest R(1-tax))
Equity: Equity used * Reciprocal of Buyer's P/E

You subtract these values from net income to find the ending net income. This is used to calculate the new P/E values

What are the possible ranges of multiples once a transaction is executed?

It should be in between the multiples of each individual company, but you cannot just average them because there is a difference in size.

Its not a weighted average either. You need to weigh how each purchase method affects EV/EQV and how they affect EBITDA or Net income independently

From there, you can find the actual multiples.

How do combined multiples change depending on the purchase method?

Enterprise value and EBITDA multiples should not change. Equity value multiples is changed significantly because the amount of equity issued changes the compiled version

Net income is significantly affected by the interests earned and payed on debt

How do the combined multiples change in a 100% cash of stock deal?

Enterprise value should not be affected no matter the funding method. Equity value is however. So the less equity you use, the less the combined equity value is.

With the EBITDA, this should not be affected since it excludes interest payments from debt and from cash generation.

With Net Income, this is affected by interest on cash and debt.

So P/E is affected more than anything, but it depends on the circumstance

Generally, a 100% cash deal will create a P/E lower than 100% stock because the decrease in equity value is greater than the % decline in net income.

How do you compile P/E and EV/EBITDA multiples?

P/E = sum of equity of acquirer + value of equity issued / combined net income - costs of purchase method

EV/EBITDA = Sum of Enterprise Values / compiled EBITDA

How do the Combined Equity Value and Enterprise Value relate to the purchase method?

Enterprise value is to affected by the purchase method. It is always the sum of the 2

Equity Value depends on how much equity was used since the equations is Acquirer's equity value + value of equity used in deal = combined

In a 100% cash or debt deal, does the equity value of the target just disappear?
No, the equity of the target company is being converted into either debt or cash. Its reflected in the combined enterprise value calculation. No value is lost, just equity is converted

An Acquirer with an Equity Value of $500 million and Enterprise Value of $600 million buys another company for a Purchase Equity Value of $100 million and Purchase Enterprise Value of $150 million. What are the Combined Equity Value and Enterprise Value?

An Acquirer with an Equity Value of $500 million and Enterprise Value of $600 million buys another company for a Purchase Equity Value of $100 million and Purchase Enterprise Value of $150 million.
What are the Combined Equity Value and Enterprise Value?

The combined enterprise value is just the sum of their enterprise values
600+150=750 mil

You can't really know the equity value since you don't know how it was funded
Combined Equity Value= acquirer's equity value + value of new issued stock

So if it was a 100% stock deal the combined equity value would be...
500+100=600 mil

So depending on how much equity was used, the combined value is between 600 and 500 mil