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M&A

Accretion / dilution (Advanced)

By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching

5 min read · updated July 30, 2026

The basic version gives you the four-step build and the P/E shortcut. Level 4 and 5 questions add the adjustments that shortcut ignores, then ask you to solve the build backwards.

The full build

Every term below is after-tax, and forgetting to tax-effect any of them is the fastest way to lose the question.

PF EPS=NIA+NIT+pS(1−t)−ΔD&A(1−t)−Inew(1−t)−Iforegone(1−t)−F(1−t)SharesA+Sharesnew\text{PF EPS} = \frac{\text{NI}_A + \text{NI}_T + pS(1-t) - \Delta D\&A(1-t) - I_{\text{new}}(1-t) - I_{\text{foregone}}(1-t) - F(1-t)}{\text{Shares}_A + \text{Shares}_{\text{new}}}

where SS is run-rate pre-tax synergies, pp is the share of them realized in the year you are measuring (phasing: often 30–50% in year one, p=1p = 1 only at run-rate), and FF is financing fee amortization. The worked example below assumes p=1p = 1 and F=0F = 0 for clarity — say that assumption out loud in an interview rather than letting it hide.

Seven moving parts in the numerator, and candidates reliably produce four:

  • Combined net incomes — the easy part.
  • After-tax synergies, phased — the pS(1−t)pS(1-t) term. Interviewers ask about phasing because synergies rarely arrive at 100% in year one, and using run-rate synergies in a year-one EPS bridge overstates accretion and understates breakeven.
  • After-tax incremental D&A from the step-up — the one most people miss entirely. See below.
  • After-tax interest on new debt — the cost of debt financing.
  • After-tax foregone interest on cash used — cash spent stops earning, and that is a real EPS cost even in an all-cash deal that carries no new debt.
  • Financing fee amortization — the FF term, if the question gives it to you.

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Frequently asked

What adjustments does a full pro-forma EPS build include?
Combine the two net incomes, then layer in after-tax synergies, after-tax incremental D&A from the purchase accounting step-up, after-tax interest on new debt, after-tax foregone interest on cash used, and any financing fee amortization. Divide by the acquirer's shares plus new shares issued. The step-up D&A is the adjustment candidates forget most often.
What is breakeven synergies?
The level of pre-tax synergies that makes pro-forma EPS exactly equal the acquirer's standalone EPS. You solve for the synergy number that closes the gap rather than testing values by trial. It is a favourite interview question because it tests whether you can rearrange the build rather than just run it forwards.
When does the P/E rule of thumb break down?
It assumes an all-stock deal with no synergies, no purchase accounting step-up, and no financing cost. Add meaningful synergies and a low-P/E buyer can still be accretive. Add a large step-up in depreciable assets and a high-P/E buyer can be dilutive. The rule is a first-order screen, not a conclusion.
Why does the step-up create dilution?
In purchase accounting you write acquired assets up to fair value, which raises the depreciable and amortizable base. That incremental D&A is a real charge against pro-forma earnings, so it reduces EPS even though no extra cash leaves the business. Goodwill itself is not amortized, but identified intangibles are.
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