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Hard
Company A (P/E 15x) buys Company B (P/E 10x) with 100% debt. At what interest rate does the deal turn dilutive (assume 40% tax rate)?
Answer
Seller's earnings yield = 1/10 = 10%. For the deal to turn dilutive, the after-tax cost of debt must exceed 10%.
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accretion dilutiondebt financing