How do you calculate pro forma EPS in an accretion/dilution analysis?

First calculate earnings by dividing market cap by P/E ratio. Then divide earnings by shares outstanding to get EPS. Do this for both the acquirer and the target. The acquirer's standalone EPS is your benchmark for determining whether the deal is accretive or dilutive.

Four key adjustments affect the earnings numerator: add the target's earnings, subtract after-tax interest on new debt, subtract the after-tax opportunity cost of cash used, and add after-tax synergies. The share count increases by the number of new shares issued, calculated as stock consideration divided by the acquirer's share price.

The most frequent errors are forgetting the tax shield on interest (interest must be after-tax), using the wrong share price for new shares (must use the acquirer's price), ignoring the deal premium when calculating the target's effective P/E, and applying synergies pre-tax instead of after-tax.

The premium increases the effective P/E you pay for the target: offer P/E equals trading P/E times one plus the premium, so a target trading at 10x with a 50% premium costs an effective 15x. In the EPS Method, the premium raises the purchase price (target equity value times one plus the premium), which means more new debt, more cash used, or more new shares issued to fund the deal. Those adjustments drag on pro forma EPS, so a larger premium makes the deal harder to keep accretive.