How can you evaluate if a deal involving all three forms of payment is accretive?

To evaluate whether a deal involving all three forms of payment—cash, stock, and debt—is accretive, utilizing the inverse P/E ratios of the buyer and seller is a key method. This approach involves analyzing the price-to-earnings (P/E) ratios of both the acquiring company and the target company.

When you take the inverse of the P/E ratio, you obtain the earnings yield, which allows you to compare the earnings generated by the acquisition relative to the cost of acquiring those earnings. If the earnings yield from the acquisition (represented by the seller’s P/E ratio) is greater than the buyer’s cost of capital (which can also be inferred from the buyer's P/E ratio), the transaction will likely be accretive to earnings. Accretive transactions increase the acquirer's earnings per share (EPS), which is often the goal of such mergers or acquisitions.

In contrast, other methods mentioned might not directly address the core question of assesssing accretion effectively. Comparing cash return to equity value, determining total deal value, and calculating effective interest rate provide valuable insights in different contexts but do not specifically measure the relationship between the earnings yields of the involved parties in a way that is critical for assessing accretion.