How do you determine if an acquisition is accretive or dilutive to EPS?

To determine if an acquisition is accretive or dilutive to Earnings Per Share (EPS), it is essential to compare the pro forma EPS after the acquisition to the pre-acquisition EPS. This comparison provides direct insight into how the acquisition affects the earnings available to each share of stock.

If the pro forma EPS after the acquisition is higher than the pre-acquisition EPS, the acquisition is considered accretive, indicating that it has increased the earnings attributable to each share. Conversely, if the pro forma EPS is lower, the acquisition is deemed dilutive, reflecting a decrease in earnings per share. This method focuses specifically on the impact of the acquisition on earnings relative to the number of shares outstanding, which is crucial for assessing the financial health and performance of the company post-merger.

The other options provide insights into different aspects of the acquisition but do not directly address the EPS impact. For instance, comparing the share price or market capitalization may provide information about market perception and value but does not clarify the actual earnings attributed to each share. Similarly, comparing pro forma net income to pre-acquisition net income reflects overall profitability rather than the specific efficacy of the acquisition in relation to existing share value. Thus, measuring the change in EPS is the most direct and effective