You are analyzing an acquisition using either 100% debt or 100% equity as the only two financing solutions. You perform an analysis of capital sources and the impact on the firms earnings for the $3 billion deal. ABC Inc. currently has 800 million shares outstanding and a market price of $50 per share. The firm has a cost of debt (before tax) of 7 percent. The target firm has $800 million in debt carrying a 12% rate that will be assumed by ABC Inc. You run an analysis that includes a five-year projection for the combined company to determine EBIT in Table 3. Using either all equity ($50 issuance price) or all debt (7%) to buy Target Co., assuming no flotation costs in this model, and assuming 30% tax rate, when is the deal accretive to earnings and how should the firm finance the acquisition?

Table 3. Combined projection of EBIT for ABC Inc and Target Company & EPS for ABC Alone Without Acquisition

		Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Combined	EBIT	4,500,000,000	4,455,000,000	4,722,300,000	5,194,530,000	5,713,983,000	6,171,101,640
Without Acquisition	ABC Inc EPS	$2.75	$2.97	$3.21	$3.46	$3.74	$4.04