In financing a transaction, our two main sources of funding are debt and equity The amount of debt that we can raise, generally depends on the consolidated debt capacity of the two companies after the deal So we start with an EBITDA multiple, which will help us calculate the maximum debt capacity the company can take on So with that EBITDA multiple, you need to calculate proforma EBITDA Times the two together, EBITDA times by the multiple and that will give you you're maximum consolidated debt We now need to compare that with your total pre deal debt Let's say pre deal the two companies had 400 of debt and the maximum consolidated is 500, great! That gives you an extra 100 of debt that you can issue The interest rate that you're charged will be based on consolidated risk and of course this extra debt may impact credit rating So we have to be happy that our credit rating isn't being impacted too much, otherwise our own shareholders are going to become unhappy The other main funding source is equity There are some downsides to using equity funding, firstly it's more expensive than debt The cost of debt is going to be cheaper than the cost of equity New shares issued means diluted of ownership for the acquiring shareholders. They may not be happy about that Also if you're going to pay with shares then the amount that you're paying may be impacted by the volatile share price Those target shareholders that are going to receive your new shares They may look at those shares and go "hmm, not sure I'm happy about this" "I want you to pay me a bit more because I'm going to take on the risk of these volatile shares" You target shareholders may also look at these news shares and go, "do you know what, I just don't want them" Imagine I'm a British company (a British acquirer) and we're acquiring a US company As soon as those US shareholders can sell out, they may say we don't want to owned by a British company We don't want to receive British pounds in our dividends "Do you know what, I'm just going to sell up" and that's share flowback In addition, post deal ownership is an issue for your acquirer shareholders (particularly dilution) So to try and help our shareholders at least understand the impact of this, the exchange ratio is calculated for the offer document I.e. the number of new shares that we're giving for every one share that we're buying