Walk me through the full accretion/dilution analysis for a cash-and-stock deal. How do you calculate the pro forma EPS if the acquirer uses 50% cash (debt financed) and 50% stock?
An advanced M&A Advisory question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
First, determine the purchase price and split between cash and stock. For the cash portion, calculate the after-tax interest cost on new debt (interest rate * (1 - tax rate)) and subtract from acquirer's net income. For the stock portion, compute new shares issued based on acquirer's stock price. Add target's net income (adjusted for synergies and amortization of intangibles) to acquirer's net income, then divide by the new total shares outstanding. Compare to acquirer's standalone EPS; if higher, accretive.
WHAT INTERVIEWERS LISTEN FOR
- ✓Split purchase price into cash and stock components
- ✓Calculate interest cost on debt (after-tax)
- ✓Calculate new shares issued for stock portion
- ✓Combine net incomes and divide by new share count
- ✓Compare to standalone EPS
COMMON MISTAKES
- ✗Ignoring tax shield on interest
- ✗Forgetting to adjust target's net income for synergies and amortization
- ✗Using pre-tax interest cost
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