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

Q: How do you calculate standalone EPS in a merger model?

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.

Q: What deal adjustments affect pro forma EPS?

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.

Q: What are common mistakes in accretion/dilution math on paper?

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.

Q: How does the purchase premium affect accretion/dilution calculations?

The premium increases the effective P/E you pay for the target. If a target trades at 10x P/E but you pay a 50% premium, the effective P/E becomes 15x. This raises the bar for accretion because you need the target's adjusted earnings yield to still exceed your cost of capital after accounting for the higher price.

Master the EPS method for M&A accretion analysis. A cheat sheet covering the key formulas, the split-paper framework, and common interview traps.

MN·3 min read··

"In God we trust. All others must bring data." — W. Edwards Deming

Core Relationships

Two formula clusters connected by Shares Outstanding.

Company Level:

Market Cap = Earnings \times P/E

Earnings = \frac{Market Cap}{P/E}

P/E = \frac{Market Cap}{Earnings}

Per Share:

Share Price = EPS \times P/E

EPS = \frac{Share Price}{P/E}

P/E = \frac{Share Price}{EPS}

The Bridge:

Share Price = \frac{Market Cap}{Shares}

EPS = \frac{Earnings}{Shares}

P/E is identical whether calculated from totals or per-share figures. Use this as your sanity check.

Problem Framework

Split your paper. Left: given inputs. Right: solve sequence.

Given	Solve
Revenue (A, B)	1. Standalone EPS_A
EBITDA (A, B)	2. Deal Adjustments
P/E (A, B)	3. Pro Forma EPS
Shares_A, Price (A, B)
Premium, Mix, Tax Rate, Interest Rate

Step 1: Standalone EPS

Earnings = \frac{Market Cap}{P/E}

EPS_{A} = \frac{Earnings _{A}}{Shares _{A}}

Calculate for both companies. EPS_A is your benchmark.

Step 2: Deal Adjustments

Purchase Price:

Purchase Price = Target Equity Value \times (1 + Premium)

ΔEarnings:

Source	Impact
Target Earnings	+
New Debt Interest	$- Interest \times (1 - t)$
Cash Used	$- Cash \times Rate \times (1 - t)$
Synergies	$+ Synergies \times (1 - t)$

ΔShares:

New Shares = \frac{Stock Consideration}{Acquirer Share Price}

Step 3: Pro Forma EPS

EPS_{PF} = \frac{Earnings _{A} + Earnings _{B} - After-Tax Interest + Synergies}{Shares _{A} + New Shares}

Accretive if $EPS_{PF} > EPS_{A}$

Common Errors

Trap	Correction
Forgetting tax shield	Interest is after-tax: $\times (1 - t)$
Wrong share price	New shares use acquirer's price
Missing premium	Offer P/E = Trading P/E $\times (1 + Premium)$
Pre-tax synergies	Synergies flow through income statement—apply tax

For the conceptual breakdown of Yield Method vs EPS Method, see Accretion/Dilution Analysis.

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Frequently Asked Questions

How do you calculate standalone EPS in a merger model?

What deal adjustments affect pro forma EPS?

What are common mistakes in accretion/dilution math on paper?

How does the purchase premium affect accretion/dilution calculations?