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Accretion / Dilution Calculator
Test whether an acquisition raises or lowers the acquirer's pro-forma EPS.
Accretion / dilution asks a simple question interviewers love: does this acquisition raise or lower the acquirer's earnings per share? Combine the two companies' net income, subtract the after-tax cost of any cash or debt used, add new shares issued for the stock portion, and compare pro-forma EPS to standalone EPS.
The intuition to internalize: an all-stock deal is accretive when the acquirer's P/E is higher than the multiple it pays for the target. Cash and debt are cheaper than equity when after-tax financing costs less than the target's earnings yield — so the funding mix swings the answer. Add synergies and the deal gets more accretive.
Acquirer
Target & deal
Financing
Accretive
+4.6%
Pro-forma EPS $5.23 vs standalone $5.00
With your numbers
Pro-forma EPS
$538.8M ÷ 103M = $5.23
Accretion
$5.23 ÷ $5.00 − 1 = +4.6%
Acquirer net income
$500M
Target net income
$50M
After-tax synergies
$0M
Less: after-tax financing cost
$11.3M
Pro-forma net income
$538.8M
New shares issued
3M
Pro-forma shares
103M
Pro-forma EPS
$5.23
Accretion / (dilution)
+4.6%
The formula
Pro-forma EPS is combined net income, adjusted for financing and synergies, over the pro-forma share count:
The adjustments are the after-tax cost of the cash and debt used, netted against after-tax synergies, where is the tax rate:
The stock portion of the price issues new acquirer shares at its share price:
The deal is accretive when pro-forma EPS beats standalone EPS, dilutive when it falls short.
How it works
- Combine net income. Add the acquirer's net income and the target's net income, plus after-tax synergies.
- Subtract financing cost. The cash and debt portion carries an after-tax cost: consideration times the financing rate times (1 minus the tax rate).
- Add new shares. The stock portion issues new acquirer shares equal to the stock consideration divided by the acquirer's share price.
- Compare EPS. Divide pro-forma net income by pro-forma shares. If pro-forma EPS beats standalone EPS the deal is accretive; if lower, dilutive.
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