Banking and private equity
Accretion and dilution in two minutes
The quick test interviewers expect, then the full earnings-per-share calculation for stock, cash and debt deals, with the break-even price.
指南以英文編寫，與面試語言一致。
The question
"Is this deal accretive or dilutive?" means: will the buyer's earnings per share (EPS) go up or down after the deal? Give the quick test first, then the numbers.
The quick test
- All-stock deal: accretive if the buyer's P/E is higher than the P/E it pays for the target (price paid ÷ target net income).
- Cash or debt: accretive if the target's earnings yield (target net income ÷ price paid) is higher than the after-tax cost of the cash or debt used.
- A mix: compare the target's earnings yield with the weighted after-tax cost of all the funding.
提示Cost of stock = the buyer's earnings yield (1 ÷ its P/E). Cost of debt = interest rate × (1 − tax rate). Cost of cash = the interest it would have earned, after tax.
The full calculation
- 1
Pro forma net income
Buyer's plus target's net income, minus after-tax interest on new debt and the after-tax interest lost on cash used. Add after-tax synergies if they're given.
- 2
Pro forma shares
Buyer's shares plus any new shares issued (stock used ÷ the buyer's share price).
- 3
Compare
Pro forma EPS = pro forma net income ÷ pro forma shares. Compare it with the buyer's EPS before the deal.
Worked examples
例題 · All stock
經程式驗證The buyer earns $100m on 50m shares (EPS $2.00) and its shares trade at $30 (P/E 15x). It buys a target earning $20m for $240m (12x), paying entirely in stock. Accretive or dilutive?
查看解題過程
- 1.Quick test: 15x is higher than the 12x paid, so it's accretive.
- 2.New shares = $240m ÷ $30 = 8m. Pro forma net income = $120m. Pro forma shares = 58m.
- 3.Pro forma EPS = $120m ÷ 58m ≈ $2.069, up about 3.4%.
答案Accretive: EPS rises from $2.00 to about $2.07 (+3.4%).
例題 · All debt
經程式驗證Same deal, but funded with debt at 6% and a 25% tax rate.
查看解題過程
- 1.Quick test: the target's earnings yield is $20m ÷ $240m ≈ 8.3%, above the after-tax cost of debt of 6% × 0.75 = 4.5%, so it's accretive.
- 2.After-tax interest = $240m × 4.5% = $10.8m. Pro forma net income = $100m + $20m − $10.8m = $109.2m, on 50m shares.
- 3.Pro forma EPS = $109.2m ÷ 50m = $2.184, up 9.2%.
答案Accretive: EPS rises to $2.18 (+9.2%).
例題 · Break-even price
經程式驗證In the all-stock deal, what is the most the buyer could pay before the deal becomes dilutive?
查看解題過程
- 1.The deal breaks even when the P/E paid equals the buyer's 15x.
- 2.15 × $20m = $300m. Check: 10m new shares, $120m ÷ 60m = $2.00, the same EPS.
答案$300m.
Common mistakes
常見錯誤
- Comparing a pre-tax interest rate with after-tax earnings.
- Forgetting the interest the buyer gives up on cash it spends.
- Saying accretive means a good deal. EPS ignores the price paid relative to value, the risk taken and the cost of equity.
- Ignoring synergies, fees or new amortization when the interviewer gives them.
Banking and private equity