Level 5: Analysis · Exercise 59 of 60 · Pro

EPS accretion and dilution

A financial modeling exercise from Modeldrill. Solve it with a live spreadsheet grid in your browser, with Fill right and Fill down, and it is checked the moment you submit.

The task

An acquirer pays the equity purchase price in B6, part in new shares at its own share price and the rest with new debt. Fill the standalone EPS (B12), new shares issued (B13: the stock portion of the price divided by the acquirer share price), new debt (B14: the cash portion), after-tax interest on that debt (B15), after-tax synergies (B16), pro forma net income (B17: both companies plus synergies less the after-tax interest), pro forma shares (B18), pro forma EPS (B19) and the accretion or dilution against standalone EPS (B20).

What this exercise teaches

Stock consideration dilutes through the share count; debt consideration dilutes through interest. A deal that is accretive when funded with cheap debt can turn dilutive when the acquirer's own shares trade at a high earnings multiple, which is why the funding mix is the first thing to flex.

A hint if you get stuck

Everything that hits net income must be after tax: interest and synergies are both multiplied by (1 - tax rate). The deal is accretive when pro forma EPS is above standalone EPS.