An investment banker is modeling a $500 million all-cash acquisition. The acquirer will finance the deal with new debt at a 5% interest rate. The target's net income is $40 million. Assuming a 25% tax rate, what is the after-tax cost of the acquisition financing, and is the deal accretive or dilutive on a standalone basis before synergies?

Why D — $18.75 million cost; accretive because target earnings of $40M exceed the financing cost

The after-tax cost of debt financing = $500M x 5% x (1 - 0.25) = $18.75M. Since the target's net income of $40M exceeds the after-tax financing cost of $18.75M, the deal is accretive by $21.25M before considering any synergies. In all-cash debt-financed transactions, the key comparison is between the target's earnings contribution and the after-tax interest cost on the acquisition financing. The tax shield on interest significantly reduces the effective cost of the acquisition.