What is the first step in creating a merger model?

• A. Determine purchase methods
• B. Project the financial statements
• C. Determine purchase price
• D. Calculate goodwill

Answer: (C)

The first step in creating a merger model involves determining the purchase price. This is crucial because it sets the foundation for all subsequent calculations and analyses within the model. The purchase price defines how much one company will pay to acquire another, which influences both the financial structure of the transaction and the terms of financing, if applicable.

Once the purchase price is established, analysts can proceed to evaluate how the acquisition will affect the combined company’s financial performance, including projecting financial statements and assessing goodwill. If the purchase price is not accurately determined from the outset, it could mislead the entire valuation process, impacting key metrics such as earnings per share and overall transaction viability. Thus, understanding the purchase price is fundamental before delving into projections or calculations regarding goodwill and other financial considerations.