If a company with a P/E of 10 acquires a company with a P/E of 12 with 50% debt and 50% equity, is it accretive or dilutive? The cost of debt is 10% and the tax rate is 40%.

Cost of equity of acquiror:
1/10=10%

Cost of acquisition capital:
(50%)(10%)(1-40%)+(50%)(10%)
= (5%)(60%)+(5%)
= 3%+5%
= 8%

Earnings yield of the target:
1/12=8.33%

8.33% > 8%, earnings yield of the target > cost of acquisition capital
Therefore the acquisition is accretive.