Accretion/dilution questions come up constantly in M&A and investment banking interviews, and interviewers usually want to see you walk through the calculation cleanly, not just state whether a deal is accretive or dilutive. Here's the sequence to follow when you get one of these prompts live in an interview.
Step 1: Get the Standalone EPS and P/E for Both Companies
Start with the basics: EPS = Net Income / Shares Outstanding, and P/E = Share Price / EPS. You need both companies' standalone figures before you can compare anything pro forma. Interviewers will often give you net income and share count directly, sometimes forcing you to derive EPS yourself first.
Step 2: Work Out the Offer Price and Exchange Ratio
If the deal includes a premium over the target's current share price, apply it first: Offer Price = Target Share Price × (1 + Premium). Then, for a stock-for-stock deal, the exchange ratio is simply the offer price divided by the acquirer's share price. Multiply the exchange ratio by the target's shares outstanding to get the number of new acquirer shares that need to be issued.
Step 3: Build Pro Forma Net Income
For a simple, no-synergy, all-stock deal, pro forma net income is just the sum of both companies' net income. This is the step where real models get more complex — if the deal involves cash or debt, you'd deduct after-tax interest expense or foregone interest income here. If synergies are assumed, add the after-tax synergy figure here too.
Step 4: Divide by the New Share Count
Pro Forma EPS = Pro Forma Net Income / (Acquirer's original shares + newly issued shares). Compare this to the acquirer's standalone EPS from Step 1. Higher pro forma EPS means accretive; lower means dilutive.
The Break-Even Shortcut Interviewers Love
Once you've built the numbers once, it's worth stating the shortcut out loud: in an all-stock deal with no synergies, the deal is accretive whenever the effective P/E the acquirer pays for the target (offer price ÷ target EPS) is lower than the acquirer's own P/E multiple, and dilutive when it's higher. Naming this rule — and being able to explain why it holds, not just recite it — is usually what separates a strong answer from an average one.
Our Accretion/Dilution: The Basic Concept case study walks through this exact sequence with full numbers: a $400m-net-income acquirer at a 20.0x P/E buying a $100m-net-income target at a 20% premium, computing the exchange ratio, pro forma EPS, and confirming accretion using the break-even rule.
Common Ways Candidates Lose Points
The most frequent slip is using the target's pre-deal P/E instead of the premium-inclusive offer price when checking the break-even rule — the acquirer isn't paying the pre-deal price, it's paying the offer price, so that's the multiple that matters. The second most frequent slip is forgetting to add the newly issued shares to the acquirer's share count before dividing. Both are easy to catch if you narrate each step out loud as you go, rather than jumping straight to a final number.
If you want to build confidence with the underlying M&A logic before tackling the math, it's worth reviewing What Is M&A and Why Do Companies Do It? first — accretion/dilution only makes sense once you understand what a deal is actually trying to accomplish.