M&A, accretion & purchase accounting / ORIGINAL SCENARIO

Cash acquisition EPS

Acquirer net income 120, shares 40. Target net income 24. Cash purchase 300 funded from excess cash earning 4% pre-tax. Tax 25%. Find pro forma EPS and accretion.

Amounts $m. Full-year ownership, no synergies, fees, purchase accounting amortization or new shares. Enter accretion as decimal.

Try it before the answer →

Worked answer

standalone: 120 ÷ 40 = 3
proforma: (120 + 24 − 300 × 0.04 × (1 − 0.25)) ÷ 40 = 3.375
accretion: ((120 + 24 − 300 × 0.04 × (1 − 0.25)) ÷ 40) ÷ (120 ÷ 40) − 1 = 0.125

Subtract after-tax foregone interest from combined earnings.

Divide by unchanged shares; compare to standalone EPS.

Technical follow-ups

Can a deal be EPS-accretive but destroy value? Explain without relying only on EPS.

How would a higher cash yield change the accretion result, holding everything else fixed? Explain the opportunity cost.

Follow-up answer guide

Yes. Accretion can result from financing and earnings-yield differences even if price exceeds economic value. Evaluate incremental risk-adjusted cash flows versus consideration; EPS is not NPV.

A fresh retry

The acquirer has net income of 150 and 50 million shares. Target net income is 30. A cash purchase of 400 uses excess cash earning 5% pre-tax, with a 25% tax rate. Calculate standalone EPS, pro forma EPS and accretion.

Amounts $m. Full-year ownership, no synergies, fees, purchase accounting amortization or new shares. Enter accretion as decimal.

Inspect replacement inputs

ani: 150
shares: 50
tni: 30
price: 400
rate: 0.05
tax: 0.25

Check the retry bridge

standalone: 150 ÷ 50 = 3
proforma: (150 + 30 − 400 × 0.05 × (1 − 0.25)) ÷ 50 = 3.3
accretion: ((150 + 30 − 400 × 0.05 × (1 − 0.25)) ÷ 50) ÷ (150 ÷ 50) − 1 = 0.1

Original fictional example. Not a report of a specific firm’s interview. Explanations need qualified human review.