Series 79 practice questioneasyAccretion/Dilution Analysis
In an accretion/dilution analysis, a transaction is considered accretive to the acquirer when:
- AThe acquirer's stock price increases on the announcement date
- BThe target's revenue is higher than the acquirer's
- CThe combined entity's pro forma earnings per share exceeds the acquirer's standalone EPS✓ Correct answer
- DThe acquirer pays less than the target's book value
Explanation
Why C — The combined entity's pro forma earnings per share exceeds the acquirer's standalone EPS
A transaction is accretive when the acquirer's pro forma EPS (after the deal) is higher than its standalone EPS (before the deal). This means the acquisition adds more to earnings than it costs on a per-share basis. Conversely, a dilutive deal results in lower pro forma EPS. While accretion/dilution is an important metric for acquirers, it should not be the sole determinant of whether a deal creates long-term value.
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