Rationally financing an acquisition

•The paper extends the Margrabe (1978) formula such that it includes debt and equity financing.•Debt and equity are shown to follow sub-martingale process.•Scale invariance illustrates that debt and equity to change the option but the ratio f the option value.

This paper explores benefits of debt and equity in financing REIT acquisitions within the OPT framework. The Margrabe formula is altered in order to incorporate debt and equity. Scale invariance illustrates that debt and equity funding in REIT M&A increases the PV of receiving the stock in future if and only if the option finishes in-the-money position. On the other hand, funding has similar effects in Margrabe, B-S and asset or nothing formulas.