Calculating relative P/Es (price earning multiples), can help us calculate whether an acquisition fully funded by equity Or an acquisition fully funded by debt, can go ahead i.e will it be EPS accredited or dilutive So let's calculate the P/Es, first of all we'll do it for the acquirer I know that their share price is going to be right up at the top, the share price is 18 (I'm going to lock that) And now I'm going to divide that by their forecast EPS, which we've got a little further down in row 45 I can now copy that to the right For the acquisition P/E, I'm going to use the offer price The offer price is 5, again I'm going to lock that And divide that by their EPS, which is a little bit further down in row 50 Last up is the debt P/E, the debt P/E is one divided by the cost of debt. That's a little bit further up in your other assumptions I'm going to lock onto that, but I also want that post tax. So I times that by one minus the tax rate (which than the same section) Lock onto that And I want to make sure I put brackets around all of the denominator And that gets me a multiple of 28.6 So the rule is, if your acquisition P/E is higher than your acquirer P/E. Then that is going to be EPS dilutive Let's see if we can explain that also using the earnings yield i.e I'm going to invert the P/E, to make it an E/P I'm going to take one divided by the 14.3 And if I turn that into a percentage, that gives me my earnings yield of 7% Maybe I buy a share for 14.3 dollars for instance, I get one in return (that's giving me a 7% return) If I copy that down I can see that my acquisition P/E is 5.6, well what does this mean? Well this means that the acquirer is currently making a return of 7% And what they're going to do, they're now going to invest in the company making a 5.6% return. This seems like a poor reinvestment However If we carry on down again, we can see that the cost of debt post tax is 3.5% So if the deal was fully funded by debt, we would borrow at 3.5% And reinvest at 5.6%. That seems like a good deal So fully funded by debt in year one, would give us EPS accretion. Fully funded by equity in year one would give us the EPS dilution It is quite a rough measure as in it's only looking at the extreme on just debt funding or equity funding If we've got anything in the middle, then we have to create a model like this one